Markets

A Pullback This Week Could Set Up a Big Rally

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Stocks closed up for the third week in a row. This could be the signal that a pullback is finally near.

Look For More Gains Into Year End

SPDR S&P 500 (NYSE: SPY ) gained 0.89% last week and reached another new all-time high. This was the third week in a row that SPY closed higher. Market prices do not move randomly, and consecutive runs (periods of time when the market closes up or down for a number of weeks in a row) mean something.

In general, runs show the direction of the trend. If prices were random, there should be a 50/50 chance that they will be up or down in any week. Testing shows that SPY has actually closed up in 56% of the weeks since 2001.

Over the long term, stock markets have an upward bias, and this results in slightly more up weeks than expected from a random process.

In the short term, markets tend to revert to mean. That means we would expect a pullback after a gain. If you had bought SPY after an up week and sold one week later, you would have enjoyed winning trades 50.2% of the time, but the losses were larger than the winners, and overall, in the average week after a gain, SPY closes down by 0.05%.

Buying after SPY closes down for the week would have been a winning strategy with an average gain of 0.27% and winners 58.2% of the time.

When SPY has been up three weeks in a row, which is the length of the current streak, it has declined 51.4% of the time the next week with the average loss being 0.01%.

This is not a tradable edge, but it tells us that we should be looking for a pullback in the stock market. October has been a good month with SPY up 4.73% and PowerShares QQQ (Nasdaq: QQQ ) up 5.1%. A pullback should be considered a buying opportunity.

As you can see below, November and December are two of the most bullish months of the year for SPY:

SPY has closed higher 71% of the time in November and 75% of the time in December since it began trading. December is the month with the highest number of up closes. This is probably caused, at least partly, by investors adding money to their accounts at the end of the year. April is also a strong month, closing higher 72% of the time. April is the month many investors add money to their retirement accounts to help lower tax bills that are due that month.

Because we have a logical reason for bullishness in these months, this tendency should not be ignored. It is probably not random, and we should remain bullish until the market turns bearish.

Gold Reaches Resistance

SPDR Gold Shares (NYSE: GLD ) added 2.85% last week and is now up 6.41% in the past two weeks. GLD closed last week at resistance and near a buy signal on the stochastics indicator. Stochastics have not signaled yet, but an up close on Monday should turn the indicator bullish.

We still do not have updated Commitment of Traders ( COT ) data from the Commodity Futures Trading Commission (CFTC). Current data should be available by Nov. 8, but until then, we are missing important information about the gold market.

This article originally appeared on ProfitableTrading.com:

Market Outlook: A Pullback This Week Could Set Up a Big Rally

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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