The market was down 1.6% last week and Wednesday's decline (on
12/11) was the largest in four months. Is this the beginning
of the market's long overdue 20% pullback?
Given that it's mid-December and most investors are looking for
another Santa Claus rally, the media and their professional sources
aren't giving the idea of a sizable pullback potential much
attention. All eyes are now focused on the the Fed and the
expected Santa Claus Rally. December, on average, historically
returns 1.5%, which is twice as good as the typical month.
A Contrarian Perspective
If the market (NYSEARCA:VTI) really fools the majority of people
most of the time, it seems that a Santa Claus rally would not occur
this year as the general consensus seems to be that Santa Claus is
Fed taper is still far from a certainty just as it has been
during numerous pullbacks over the past year, so again it seems the
majority of investors are not expecting much December surprise,
chalking this latest pullback up as just another buying opportunity
in this record breaking rally.
And so far, that is all this pullback is - another dip buying
opportunity. That is, until it isn't any longer.
But how will we know when it isn't "any longer"? We use
technicals to warn us.
The Market Setup
Over the past two months we have used technical analysis to trade
the short term movements of the market, and it's worked well,
capturing over 4% of gains in the S&P (NYSEARCA:SSO) for our
readers. We are also now watching a similar technical setup
as those previous trades that were able to capture the market's
moves to new all time highs.
The chart below was provided to our subscribers on 12/11 and
shows the current technical outlook with two S&P (SNP:^GSPC)
setups we are watching.
The stock market (NYSEARCA:DIA) has essentially gone nowhere the
past two months as the S&P 500's October price high was at 1775
and Thursday's (12/12) price fell below that 1775 high.
In the above chart, a bearish technical pattern shown in red has
also formed. If the market closes below 1775, it will trigger
that trade and suggest the market (NYSEARCA:SPXS) has further to
fall before this decline is over. At this point I put the
odds in favor of this outcome, but so far the market has not closed
We prefer not to go against the trend, so until the market
closes below 1775, it will not confirm the bearish outcome.
The Bull Setup
Given the market's historical rise over the last year, all
pullbacks have provided buyers at key price levels. 1775 is
now that key level as former resistance is now support that has
also held this pullback thus far, so buyers are again stepping in
at that level. Therefore if they can push the market back
toward new highs, it should be bought (NYSEARCA:VOO), just as we
did in September, October, and November and suggested again in the
Relying on traditional investment tools such as fundamentals,
news, or valuations has not been the way to play this market, as
all news it seems has been used to justify the market's continued
Instead, letting price be your guide is a better way to follow a
market that has been in one of the longest and largest bull runs
ever. 1775 is the first key level that will warn us the long
trade is no longer the front runner.
utilizes Technical, Sentiment and Fundamental indicators to stay on
the correct side of the market. The trend is your friend and
that trend has been up, but if 1775 fails it will be the first
warning shot that this market's path of least resistance may no
longer be higher.
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