What we know:
An indecision doji on Thursday, November 15th, had the potential of sending markets into a consolidation phase, which appeared to have been confirmed on Friday, the 16th with a 6.55pt rally. Considering that the RSI 14 had dropped to 27 and that we had two climax selling days, Wednesday the 7th and Wednesday the 14th, and we were headed into a holiday week, there was a good probability that we would get some upside in the week of the 19th but there was no indication that we would get the huge upside that followed. On Monday the 19th, we got a 1.99% rally in the $SPX on decent but not great volume. This rally gave us a 90% up day, a CCI ‘buy’ signal and set the stage for the potential of an IBD type follow-through day needed to confirm that market dynamics have changed and that a new rally leg would ensue. Friday’s rally does not, IMHO, qualify as a follow-through day. I’m basing this on the volume, which, if averaged out over a regular 6.5 hour session, would have been only 1.6billion shares. Plus, this mythical follow-through day should come with a gain of close to if not more than 2% with very convincing volume. If we’re going to get such a day, then it will have to come by next Friday, the 30th, or the signal will be deemed invalid.
Further, all this crap about the Fiscal Cliff is simply crap. On a per capita basis, Red states get more Federal dollars than do Blue states. If you think the Republicans, who whine and cry about government spending, are going to kill the goose that lays the golden egg and turn off the money spigot then think again. It ain’t gonna happen. Oh yeah, we’re certain to get some more brinksmanship, but in the end disaster will be averted.
What we don’t know:
Since the market topped out on September 14th, we’ve had several very convincing rallies, all of which failed and we just don’t know yet whether or not this current rally is different. Because we finally got climax sell signals/capitulation, this rally attempt has a better chance to succeed than have any previous attempts since the September high but for now we have to look at what happened this past week as just a dead cat bounce and a mega short squeeze. In fact, watching the ES near Friday’s close it appeared to me that I was witnessing forced buying, as in short covering, rather than organic buying.
Hanging over the market’s head is the potential for a capital gains tax increases for stocks. This is not a certainty yet and the uncertainty may be enough to force the liquidation of millions and millions of shares. Historically, when capital gains taxes have been increased, the markets have dropped in December.
What Bulls & Bears need to watch out for next week:
The market reveals itself on pull backs as it lets us know if it has the strength to recover from the pull back or if it’s too weak and just rolls over and becomes a new decline. After this past week’s rally, it would be naive to think we’re just going to go parabolic without some kind of give back. Because we got extremely overbought this past Friday with a 90% up day and with a $TRIN reading at .31, I would expect a pause day for Monday, though, with the weekend in between, there may be other factors that influence Monday’s market action as in strong or weak retail sales. Still, we need some kind of a pull back next week so that we can see if the market has the strength to recover and start putting in a series of higher lows and higher highs.
If we’re going to get a follow-through day, it must come by next Friday, the 30th. This will be a rally day of close to or exceeding 2% on huge volume. We get this and, despite the threat of a capital gains increase and any other bad news, the markets could be good to go into next March/April.
There is a very strong potential for a Breadth Thrust per Martin Zweig. This occurs when Zweig Breadth Thrust rises from below 40 and then up above 61.5 in 10 sessions. ZBT has climbed from 35.76 to 59.67 in five sessions and if there is any kind of a rally on Monday ZBT may well rise above 61.5. But it doesn’t have to happen on Monday as the 10th session would be next Friday, November 30th. If this were to happen then, according to Mr. Zweig, it would mark the beginning of a new bull market. The last time that this came close to happening, at least that I remember, was in August of 2010. The fact that it didn’t happen had little impact on the market at the time and if it does happen next week it may not have much positive impact, either, but would be an interesting and bullish sign.
Edit Sunday, November 25th: The only place I know of where you can find data for Zweig Breadth Thrust is over at FreeStockCharts.com. Just type in T2103 into the quote box and it will appear in the drop down menu.
The markets are at a critical juncture with no clear direction, but we’re certain to have a better idea as to the market’s direction by the close of next Friday’s trading, if not sooner. My analysis indicates that the bottom is in for now and should endure. Personally, I would prefer that we’ve seen the bottom for this cycle and that from here we rally into next spring but it’s the market that makes the decisions and the market loves to make fools of those who attempt to divine its course.
Q 60min chart which, with the RSI above 70, is showing the Q’s to be extremely overbought. Normally I would expect some give back which would allow the oscillators a chance to recycle but I have also seen times when the RSI has remained above 70 for several sessions before recycling lower. It’s just going to depend on how AAPL fares on Monday/Tuesday.
Also, let this be a proxy chart for IWM, SPY, DIA, XLF, RTH, and several other sector ETF’s as the charts all look pretty much the same.
(Click on the charts to open them in a new window.)
SPX daily chart showing that it broke above the falling price channel. I tried to put a fresh up trend line on the chart but could not get the required three touch points using the candle bodies. When I can get those touch points, I will remove the falling price channel.
The DI lines have now had a bullish cross. The strategy that many follow when this happens is to buy when the index, stock, or ETF in question closes above the high of the day that this bullish cross occurs. In this case, that would be a close above 1409.16.
Also note on the chart that the 5,3,3 Sto is at very overbought levels. Add this to the fact that several other indicators are showing extreme overboughtness and this further suggests a pause day for Monday.
The markets have a lot going for them heading into the early days of next week’s trading. It’s theirs to either build upon or to lose. Market participants will need to remain hypervigilant next week so as not to be surprised by either a continuation of this past week’s action or a resumption of the down trend that has dominated market action over the past several weeks.
Only the paranoid survive.
Be careful and GL in the week ahead.