Do Indexes Melt Up?

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Thank you, everyone, for all your kind wishes. I really appreciate it. I feel extra-bad since I haven't really been looking at comments since Saturday, and I know there are all kinds of interesting things to be read.

I wanted to start the day wondering: do indexes melt up the same way they melt down? I think it's a vital question to ponder right now, because a lot of people (me included) have noted a "wide open field" between current market levels and where they were back in September before things really started tumbling.

There's an old saying that stipulates markets need volume to push higher but they can collapse on their own weight. I'm a proponent of that; to me, the logic of a market falling swiftly past an important support level into the "thin air" of a formerly quick ascent makes for sound market psychology. The notion that many holders at higher levels want to get-the-hell-out of a falling market rings true, since they want to avoid seeing losses become higher losses.

I'm really not as sure the reverse holds true. If an index fell from 1200 to 1000 and stabilized, what would the impetus be for it to soar back to 1200? Sure, it might climb up the proverbial wall of worry back to its former level, but I can't see it shooting back up there (and remember, I'm speaking of broad indexes here, not individual equities – as we've seen with the likes of BPO, anything is possible when it comes to single stocks).

Let's take a look at the S&P 500 using the upside-down feature (Ctrl-U) in ProphetCharts. I am deliberately looking at this chart upside-down since my eyeballs are permanently affixed with bear goggles:

0804-meltup

The yellow zone I've tinted is the hypothetical "melt-up" area (although it's "melt-down" here, since the graph is flipped). But let's pretend for a moment this is, in fact, what the index looks like. Even with bearish eyes, how excited would we be about this chart plunging? I think the arguments against its plunging would be along these lines:

  1. It is just about touching a major upper channel line, above which it explosively ascended earlier, thus suggesting important support;
  2. It is also simultaneously at a major Fibonacci retracement level;
  3. And, simply stated, it has fallen an extraordinarily long way in a very short amount of time and seems due for a healthy bounce.

Does that yellow zone represent a thick layer of support? No, it doesn't; I suppose with a bearish graph, there's very little holding it up. But "price gravity" works in only one direction, and my intuition tells me that although the market may slog and grind its way higher, the movement through that zone would never happen as fast in an ascent as it did during the descent.