Is Santa Claus Or The Grinch Coming To Town?
So far it looks like Santa Claus is coming but the Grinch is lurking. December is historically a good month for stocks and this week was no exception. Investors and traders alike wasted no time waiting for the Santa Claus rally.... they placed bets that the prospect of an extension of the Bush tax cuts would create bullish enthusiasm and drive the major indexes and commodities north. ES_F is up 3% for the month in just eight trading days. Quit impressive! Yes, if you are part of the herd blindly chasing returns.
It's easy to become fixated on the market you trade when you're making money. The reality is that danger and the Grinch is lurking around every corner of the globe. You just have to look at allot of charts to know where to find him hiding. The Grinch who stole Christmas from the Whoos left them with nothing. So will be the same for weak investors who are late to this rally. They will be the first casualties when the Bear market selling resumes. With each and every minor retracement being bought ... a nest of stops awaits the Grinch to set aflame.
As the market heads into the final weeks of December, several market internals confirm the giddiness that I speak of. The attached chart of the $SPX shows that the MS UPDV_Oscillator 25 (NYSE Advance/Decline Volume Oscillator ( 25 day ave)), 5-day NYSE AD/DEC Ratio, and the 5 day NYSE New High/New Lows. The AAII poll of individual investors has reached a level of bullishness that is greater than levels at previous market peaks and the Dow has failed to confirm the rally. Each of these indicators and non confirmation presents a warning to those that are watching intently for the Grinch.
Bottom line: Prices have risen but fewer stocks have the strength necessary to sustain the rally. Today China announced that inflation surged to a 28-month high of 5.1 percent in November. On Friday China's central bank increased the amount of money that lenders must keep on reserve for the third time in one month, a preemptive move to rein in inflation. Should China raise interest rates, US markets and more specifically commodities could be adversely affected.
Elliott Wave Analysis
The advance in ES_F casts serious doubt into whether w.4 of w.(C) of w.b of w.(2) is the operative wave count. I've mentioned that the upside limit to hold onto the expanded flat correction is the area surrounding the 1.272 ans 1.386 RF extensions; 1238.5 and 1244.25 respectively. Whether these price points are breached or not doesn't take away the possibility that w.5 is underway and that w.4 actually ended at 1171.
Although I can't know for sure which interpretation is correct, the chart of the ES-F now depicts a w.5 interpretation. Hopefully on Monday we will be able to resolve the wave count as more of the subdivisions of will be in place. In the meantime, common upside targets for the termination of w.5 have been placed on the chart. I will narrow the range and discuss them as soon as possible.
Best of Trading
Hi Mike
ReplyDeleteExtremely interesting and foresightful analysis. I was looking at your wave count of the FTSE 100 weekly chart and noted you had the March 2009 low as a W1 circle. My view is that the FTSE has made 2 previous lows without making a new low and therefore see the FTSE as making a series of W1 and W2s and your W1 circle being a W2. Is it possible for you to explain your count further as Iam probably wrong but would like to know why if possible.
Thanks Andy H
Andy - Thanks for the inquiry. I'm posting this reply to your question here so you will see it. The FTSE 100 chart was under the Global Gains post. So I don't confuse other readers, I will make a new post for the FTSE so you can review my answer.
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