Naughty or Nice, Santa Could Visit the Markets This Week

Week after week we continue to maintain a bullish bias. Week after week the market looks at times ready to break down only to threaten to break higher on the climactic leg we expect for the rally.

With Christmas on Friday and many traders away from their desks it would seem unlikely that the market would stage a high volume move at this time. Asian markets that suddenly threaten corrections could also keep it in check. The Shanghai Composite has broken back below its 50 MA once again after some ugly selling late last week. It has now been over four months since this bourse, the international leader of the current rally, has made a new high. And Hong Kong’s Hang Seng has put in place a threatening looking top. Should these indices and others follow through to the downside this action could eventually put our own markets into correction, given that they have been poor stepchildren to the performance of international stock exchanges this year, clear followers and not leaders.

But we still believe the best prospects for making money continue to be made on the long side and that investors will fare best by preparing to take advantage of a robust resumption of the rally, no matter how unlikely.

We have cited the emergence of new leadership in prior columns. Indeed the Philadelphia Semiconductor Index ($SOX) moved last week to fresh recovery highs. And we have noted that smaller caps have staged successful break outs as the small and mid cap indices, which had lagged until recently, have rebounded smartly. Further, many large liquid leaders that had previously led the rally continue to base and are well positioned to emerge. Apple (AAPL) has put in a mature flat base (we have recently recommended watching for entry on our sister site) while Amazon (AMZN) has about pulled back to its 50 MA, an area that should intrigue most traders. On any resumed rally these big caps could help expand breadth and move the broad indices higher.

The bounce in the dollar has forced the volatile correction of hard assets we foresaw, but that might be ending now. The dollar ran into significant resistance on Friday and formed a reversal bar. Conversely Thursday the price of gold broke down below its previous lows and its uptrend looked ominous. But Friday saw good support and suggests if gold is not yet set to rally again it might well have put in its lows. These are important developments because a declining dollar has been matched by a rising stock market since March. A resumption of trends might well be at hand.

Also encouraging are the weekly charts of the major indices themselves. A friend of ours recently pointed out there has been little accumulation in either the S&P 500 or the NASDAQ over the last couple of months, and indeed he is correct. But the NASDAQ continues to trade near its highs, closing Friday at a fresh recovery high and the S&P 500 has now formed a highly bullish 3 Weeks Tight (3WT) pattern on top of a previous 3WT pattern, suggesting Santa could indeed be coming to town.