When are rising prices a counter-trend rally rather than a new bull market? Take a look at what Bob Prechter points out as a useful indicator of future market moves.

 

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Excerpted from The Elliott Wave Theorist by Robert Prechter, published September 17, 2010

 

Some commentators are saying that downside momentum has dried up. But such a comment is valid only while the market is falling. Remember at the end of February 2009, two weeks from the bottom, when The Elliott Wave Financial Forecast published a list of momentum indicators showing that the market’s collapse was losing intensity? It was part of our bullish argument, and it was a valid use of momentum indicators. But saying “there is no more downside momentum” today simply reflects the fact that the market has been going sideways for four months. So what? That tells you nothing about the future.

One indicator of slackening momentum during this time does have implications about the future: the volume pattern. Volume has diminished on the rallies this summer, and it has especially retreated during the September rally to date. This tells you that upside momentum, despite investors’ optimism, is terrible. The market has been attracting volume when it falls but not when it rises. It would be more valid, then, to say that upside momentum is drying up. The same thing happened from October 2007 to April 2010; volume rose during the big decline and contracted in the 13-month rally. The similar volume pattern this summer is on a smaller scale but has the same implication, which is that the market’s rallies since the April high are counter-trend moves.