Approaching Resistance

The Dow and SP500 are approaching resistance at the early December highs.  While there may be a pause there next week, the weight of the evidence points to a likely breakout with the Dow hitting 12800 and the SP500 hitting 1350 in January.  As has been the case all year it could fall apart anytime, but this time should be different.  Unfortunately the Nasdaq indexes are lagging, but they should be playing catch-up in January.

Happy Holidays!  Due to the demands of the season and other matters, I may not post again until after the New Year unless something major happens.

Dow Rebounds Off Support

The Dow gained 2.87% today in what appears to be a late follow-through for the rally that began 11/28.  The target is around 12800, which may be reached by year-end, or by mid-January at the latest.  Thereafter, traders should be watching for signs of a top at the 2011 highs, and an ensuing correction that could last into May.  

As I pointed out on Friday, sentiment had approached an extreme level, and on Monday we saw waning downside breadth which hinted at the possibility of a strong rally today.  If the Dow can clear 12258, the bears will have been pushed to the sidelines once again.  

The target for the Qs is 63 to 64.

Sentiment Closing In On Bearish Extreme

There are a number of cross currents in the market at the moment that are sending mixed messages.  The elliott wave pattern is ambiguous with a bullish bias.  The VIX is trending down, but the Dollar is trending up.  Leading stocks are no longer doing well, but some are beginning to show some buying interest.  This is a typically bullish seasonal period, however, advisors are too bullish.  One measure that is beginning to support a bullish outcome is the short term sentiment as measured by the equity-only put-call ratio.  The PPO of the ratio is now beginning to approach levels seen at intermediate term lows.  This suggests that while there may be some more testing at the current level, the next significant move will probably be to the upside as I have previously indicated.

There is one thing that bothers me though, and that is the High-Low Logic Index which reached 1.18 today.  This is not a sell signal, but it is a warning as it has moved into the neutral zone.  Confirmation of a buy signal would occur if it falls back below 1.00.

There has been buying interest at current levels the past two days, and there is every reason to think that next week will be positive.  However, the pattern of the action suggests at least one more probe of this week's lows before wave [c] up can begin.

Another Disappointing Close

Another down day was disappointing, and the bears seem to be expecting a significant decline, but while slightly lower prices may be seen tomorrow, the extended pullback seems to have run its course.  The McClellan oscillator has turned up from an oversold condition, and the pattern of the decline looks complete or nearly so.  Maybe Santa will show up next week.

That said, the weakness has put a significant dent in the number stocks that are set up to break out.  This probably means that the best we can hope for as we approach the end of the year is a rally back toward the early December highs.  It is fairly certain that the current choppy and weak rally that began October 4th is an (X) wave, and the market is currently in wave [b] of Y of (X) with wave [c] of Y of [X] to follow shortly.  Unfortunately, there is nothing that says that wave [b] can't be a triangle or double zigzag.  I'm thinking a triangle that plays out into the new year to keep everyone guessing, with a surge into late January.

What I don't see at the moment is primary wave 3 down, the mantra of the elliott wave perma-bears.

Dow Tags The 50ma

GOOG At Top Of Trading Range

GOOG has returned to the top of the range established since the January high and the June low.  After completing a 5 wave impulse at the January high, GOOG has been working on a flat correction that will most likely complete in the early part of next year after a retest of the June low.  At the moment a breakout is possible, and maybe even likely, but it would be prudent to wait for a pullback to support before assuming that it is the real deal.  It would probably be a false breakout.  Negative divergences are forming on the MACD, which may be used for short entry with a target at the low end of the range.  From there the upside target is 750 to 800, which may be seen toward the end of next year, or the early part of 2013.

More Testing with a Negative Close

We did get more downside testing today with a close under last week's low.  That is a pretty negative outcome, but the 5ma of the TRIN has now moved back to a level associated with bottoms over the last 3 years.  Also, the McClellan oscillator is again oversold.  The % of stocks above the 50ma remains well above 50%, which is also a positive.  We may see some more downside tomorrow, but unless we see a positive close on rising volume soon we will have to conclude that a much deeper correction is in progress.  Even so, as long as the 11/25 low holds, the outcome should be positive.  

I added the Qs on today's decline near the low.  We'll see if the market manages to rally tomorrow.  I also have some orders in for potential breakouts should they occur.  One possibility is SCSS which was mentioned this morning in IBD and has formed a cup and handle base on top of a larger double bottom base that triggered a buy signal on 10/20.  The new buy trigger price on SCSS is 21.24.  Be sure and use a stop.

Disappointing Start To The Week

While today's selloff was disappointing it did little to change the overall expectation for another move up as we approach the end of the year.  The volume was low, and the VIX was down in spite of the selling.  This may have just been a final shakeout before something gets started.  Even if we see more testing of last week's and today's low unless there is a solid close on volume below it, the outcome should be positive.

VIX Confirms Rally

While IBD continues to call the "Market In Correction" even after most of the recent decline has been retraced, but the VIX is saying that the rally is for real with Friday's big decline as shown below.  We see that unlike the July period when the 12ma was above the 50ma and rising, the opposite is true now with the 12ma below the 50ma and falling.  A break below the October low of 24.44 would solidify the rally, which is now expected to last into the first of January with the SP500 approaching 1340 to 1354.

As Expected

The rally that occurred was really in the pre-market futures, and then the pullback continued to lower levels as expected.  It looks like it still needs some more work, but any reversal with a positive close should be enough to conclude that the pullback is complete, unless it extends in a combination, of course.

Regardless, the rally has another leg up that could begin anytime.

Is The Pullback Over?

The Qs came within a few cents of tagging the 12ema today with just crossed above the 50ema forming a bullish hammer.  The pullback may be over already, but it is premature to make that call.  It is more likely that we will see a small rally and another decline first to create a larger 3 wave pullback.

The presidential cycle is calling for a rally into the end of the year and into the first of January.  Thereafter a multimonth decline should follow into May and a major rally into the end of 2012.  This scenario fits with the combination correction pattern that appears to be playing out right now.  It also fits with the typical 2 year rally  - 1 year correction - 2 year rally pattern that Gann described.  We are in the middle of the 1 year corrective pattern right now.  Whether or not a 2 year rally follows remains to be seen, but it will be probably be more than most are expecting.

Waiting For The Pullback To The MAs

While it is possible that a pullback will not occur, it is more likely that it will, and probably somewhere in the zone of the 12ema and 50ema as was the case after previous rallies this year.  Today's price action produced a doji-like candle, which may be signalling that the pullback is at hand.

MACD Buy Signal

A valid MACD buy signal has triggered for the Qs.  All four previous signals this year led to significant gains, and there is no reason to believe that this won't as well.  However, a pullback is likely as a clear 5 wave impulse has completed on the intraday charts.  There is no way to know how sharp it will be, but regardless it will be a buying opportunity.