December is generally expected to be one of the best months of the year with gains averaging above 1.5%. $SPX is now about 3.5% below the September closing high and if Santa Claus comes to town then maybe, just maybe, we could see the markets push up somewhere near the 1465 highs. I think Congress takes it’s Christmas break on the 21st so they have until then to make a deal averting the fiscal cliff. Since, on a per capita basis, Red states have more to lose than do Blue states and since consensus is that Republicans will be blamed if no deal is reached, you can expect a deal, maybe coming at midnight on the 20th. Personally I’m all for a mega Santa Claus rally since the TNA & UPRO I’ve been holding went green during the week of November 19th and I’d like nothing better than to hold these into March/April of next year. This would also allow me to concentrate on the futures and I’m much better trading a bullish market than I am trading a bearish market. But it’s not a perfect world.
This increase in capital gains taxes appears to be baked in the cake and this is the wild card going forward. Historically, when there’s been an increase in capital gains taxes, the markets have dropped about 1.5% during the month of December. As I’ve mentioned before, 1/3rd of all stocks are held by those who will be impacted the most by the increase in capital gains and they may just take the opportunity to unwind some of their positions, overwhelming buyers and sending markets lower. Maybe there won’t be a sell-off, but there’s no way to know right now and you certainly can’t front run such an event. Everyone is just going to have to be hypervigilant every single day this month as you don’t want to be the deer in the headlights should the markets start to roll. I would guess that those who intend to sell will wait as long as they can before showing their hands so we might see a strong rally into the middle of the month that begins to roll over after that. Who knows? Just a wild guess.
During the week of the 19th, $SPX rose 49.27pts and 3.62%. This past week we saw a gain of 7.03pts and 0.50%. By comparison, this week’s gains don’t look so hot but then who would argue if $SPX rose by 1/2% every week? Not me. Still, this is an indication of a loss of momentum and more important, at least to me, is that we did not get the follow-through day so that’s a fail. We also failed to get a Breadth Thrust but, as far as I’m concerned, that would have just been the icing on the cake. However, the fact that we failed to get the follow-through day is more important as this would have sent a message to the market that the market wants to and can go higher. Such an event would have pulled in tons of money off the side lines and sent the bears scurrying. But it didn’t happen so we’re in limbo for now. Which brings me to the chart below.
First, I must correct an error that I made on Thursday. Using the TradingView chart, Thursday’s $SPX candle did look like a spinning top, but when I looked at Stock Charts and then at Ninjatrader charts I don’t see the candle as a spinning top. I’m not really sure what kind of candle it is except that it is not a spinning top. That is not the case with Friday’s candle.
Friday’s candle is clearly a doji, which can be either a bullish continuation candle or a bearish reversal candle. For Friday’s doji to be deemed bearish, then there should be some kind of negative divergence between price action and indicators. With the exception of Wilder’s ADX, which continues to weave indecisively, I could find none. So, until proven otherwise, I’m thinking that this doji is just a pause candle and that the current dominant up trend will continue next week. The key will be whether or not $SPX closes above Friday’s high before it closes below Friday’s low as confirmation is extremely important on these doji’s.
Note that on the chart I’ve highlighted several other doji’s, some in up trends, others in down trends, and you can clearly see that it’s all about confirmation. We should have confirmation by Tuesday’s close, if not sooner.
Also, it appears that, as of Friday, On Balance Volume has moved back in sync with the market and that’s how it should be.
Remember, just because you’re paranoid doesn’t mean the chupacabra’s aren’t out to get you.
Be careful and good luck in the week ahead.