How Far Might the Santa Rally Go?

As we enjoy this Santa Rally, question is how far might it go? We have three plausible scenarios:

1. It ends this week, not much higher
2. It rallies into Jan to Dow10700
3. It rallies into May to Dow11285

(1) If we look at the typical pattern, around 25% of the whole year's rise happens in this rally, and it ends in early Jan. This gives a target of Dow10700:

• We started at Dow8802
• The Santa Rally started at Dow10236
• So far the year is 1434 pts
• A rally that is 25% of the year would be 33% up from here or 478 pts
• Target: 10236 + 478 = 10714

(2) If we look at the bigger picture, a typical rally after a sharp fall is 50-61.8% of the drop. We have gone a bit above the 50% retrace. In 1930 the retrace was 50%; whereas in 1937 after the drop to 1933 the retrace was 61.8%. The 61.8% retrace can be counted off the closing numbers or the intraday. An intraday target is Dow11285. In terms of timing, the rally so far has broken into two segments of about equal length, and is now in the third segment. if time is about the same, this goes to Feb. This seems, however, a bit far to go in such a period. Typically the seasonal rally after Santa continues all the way to May or even into June (see chart). Hence the outside target is a continuation into May.

The rally so far has been slowing down, which would also support a slow curve into May to hit the target. This would be consistent with the Summer of Disillusionment I expect for Obama next summer, where a realization sets in of a double-dip recession and a tragic failure of Obama to please either the independents (whom he is losing now) or his core base (due to a political need to triangulate back towards the center). I view this scenario as least likely of the three, in part because the Dollar Bottom will provide a huge headwind against a continuation of the rally. So far the Obama Hope Rally has been driven by massive liquidity slopping into speculation, not any real recovery of the economy. 

(Doubts about this? Read what Paul Volcker, the only honest man left in this administration, had to say over in Europe:

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.)

(3) If we look at the wave count and not typical patterns, we get a more pessimistic view. We have been in a sideways pattern which counts well as a triangle (other counts are out there but this is the easiest). After the sideways move will be a final wave up, which can be counted as either 5 of C or C itself (the difference is not that important, but it relates to whether the wave down to Nov2 is considered an X wave or a wave 2 of C). This wave 5 or C coming out of a triangle typically goes the length of the largest width in the triangle, or runs hard and much longer. Since we have been in a long rally and it is losing strength, it is unlikley this final wave will run.

In an expanding triangle, the last leg (E) is the largest, so wave 5 tends not to do more than retrace E.  Neely has found that typically the wave 5 is truncated and goes on 61.8% of E. The reason for this is expanding triangles tend to be near the end of a complex correction that has run a good ways, as this has; and the truncation indicates exhaustion. EWI in Friday's STU in contrast thinks a truncation is lower odds. As a matter of market reality, we have already run just about that width.

The next likely stopping point is for the final wave to hit or slightly break above the rising upper trendline of the expanding triangle (see chart in this recent post). Today that level would be Dow10532. So far today we are below that at intraday Dow10515. This Wed we have the FOMC meeting. Markets tend to rise into that, and fall after; unless the message jinks the market.

Tonight's STU notes that the upper trendline crosses 10543 on Wed (I think this is a typo; they mean 10548). The fib relationship of A and C in this rally points to Dow10705, where C=61.8% of A.

The issue this week is whether the Fed will begin to signal their exit from massive liquidity and ZIRP. The WSJ discusses how the Fed has already begun exiting. If the market sees a change of easy money, the top is likely to be in. A reasonable target would be around Dow10565 by end of this week. If the FOMC causes a run up, Dow10705-15 is the next level to watch.

Comments

[Wave Rust]

Neely's chart looks alot like 1938 through 1942

Even if that is what comes, it's bullish for stocks. Not so much for the economy.

wave rust

[Milen]

I already guessed about 5th wave truncation about Dow, but i still need some more approval to confirm it.
Best regards.
Milen
http://oneelliottwavetrader.blogspot.com/2009/12/djia-peak-rally-short-term.html

[da bear]

well, last year the last rally before the fall plunge took the DOW from about 10,600 to 11,800.
perhaps the 10,600 level is important.

da bear

[Michael]

People keep talking about how "weak" this rally continues to be, yet a look at the cumulative NYSE A/D line says otherwise. In fact, today the market breadth was a pretty robust 2800 to 1000.

[cloudslicer]

The only weakness I can really see if in the banking index. I've pursued a long/short strategy in this market now for the last few months that appears to be working. I like covered call funds mostly for the longs and am keeping SEF as a hedge.

If there is one thing that would abort this up trend it would be those lousy stinking banks.

Other than that we remain in am uptrend of unknown duration.

Personally I think this uptrend is crap but that hasn't prevented me from profiting from it. After all markets can trade irrationally for further and farther than any bear can remain solvent.

I just hope I'm smart enough to jump ship once the share holders turn into bag holders.

[Taz]

The NYSE A/D gives a warped version of reality given its constituents. The NASDAQ A/D usually gives a much better read and it is exhibiting major weakness.

Taz

[DG]

The NYSE A/D gives a warped version of reality given its constituents. The NASDAQ A/D usually gives a much better read and it is exhibiting major weakness.

A good old-fashioned A/D method war!! Yeee-haw!! :)

[cloudslicer]

I think an index should be created which is weighted by political clout and lobbying. Then you could long this index and short the S&P and play the flow of money to the government.

[K.D.]

Oh come on, Yelnick.
You've called the top since late summer:
Bull stampede, final surge, etc.
Stick to analysis and stop the predictions.
Santa comes his own leisure and brings
the gifts he sees fit.

[Taz]

Yee-haw :)

I think we can rule out that the US dollar has bottomed from an EW perspective.

[joe]

"Santa comes his own leisure..."

I think Santa has a pretty strict schedule.

[K.D.]

Indeed he has, Joe.
Has to climb down every chimney in the
whole wide world in less than 24 hours.
Sounds like going 200% short in a bull
market, doesn't it?

[joe]

FUNNY!!
A classic K.D.

Joe

[K.D.]

Read the full interview with Volcker.
He has been kind of silenced by Summers
& Co., hasn't he?
So, as 2009 comes to an end, an Joe soon
starts looking up his chimney, we got former
FED boss Paul Volcker, the oldest guy around
in the posh circle, acting like what in the
Soviet days would have meant years in a
Siberian labor camp.

[yelnick]

KD, I have had the good fortune to meet Volcker. Great man. Yes, Summers shunted him aside, but the old guy ain't done. Hard to send him to Siberia when Obama is trying to put a friendly face on socialism social justice. 

[TC]

Speaking of someone that needs to be sent to Siberia for not singing the same tune as his Boss, is Hochberg at EWI still unequivocally BULLISH even though Boss Prechter is 200% short?

Talk about comical.

[yelnick]

TC, Hochberg is short term bullish based on the need for a final wave (5 or C) to complete the third zigzag (their count). When Prechter launches his EWT later this week (probably after the FOMC meeting ends) we shall see where he now stands. If the market rallies towards Dow10700 by then, he will likely re-emphasize his short.

[joe]

This is a very good post. Good analysis.

PPI comes out tomorrow pre-open, isn't it? I think it could be very telling.

Joe

[DG]

In the spirit of real-time forecasting, my wave count has 1121.28 to 1122.13 SPX as the limit for this rally. We'll see.

[Michael]

Wednesday's usually see the big push in which the bulk of the unwinding of "Triple Witch" occurs ahead of expiration Friday. Something to keep in mind. :)

[jeff]

The Crap Rally is over on Dec 21...

Very serious damage to equities in mid-February 2010...

the Revolution is set for the summer of 2010.

Jeff

[Bird]

DG, are you calling the high of 2009 here? What is the basis for your levels?

[DG]

Bird,

If the wave structure I favor from the November lows is correct, NeoWave rules require that the move from the December 9th low (whether it be the actual price low or the retest of that low is unclear, hence my use of the two price points as lines in the sand for the high) be smaller in price than the move from the low on November 27th (cash low) to the high on December 4th.

[trader]

another top call??? looool... the loser ew gang in their continued suicide calls..pathetic you are..

[KRG]

Yelnick:

Neely seems to think that Gold may have topped and also that treasuries may have had a truncated rally.

And if we were to look at a potential dollar bottom and end of a major "B" in S&P somewhere here or say 5% higher, what kind of a scenario does that give?

May not be a text book deflation but seems more like a stagflation!...and time for Volcker not to be shunted to Siberia but to take centre stage ?!

Cheers

[Mike McQuaid]

DJ Transport Index nearing the golden mean retrace of the '08 high to '09 low. Action above this line will add to the confirmation of the trend.

[Dave]

Fed Meeting Wednesday? Who cares! I'm not an investment advisor. And this is not trading advice. But I think a catastrophic series of down moves into February is beginning with the final move in mid-February. The first target is 945 S&P (a 14.6% drop)(same as Bill McClaren) and it could hit before the end of December. I think Wave C has begun, possibly confirmed again by a break of 1070. This C move might teach another lesson - called hedge fund melt down of a higher order. As Cramer said once, "They have no idea how bad it is out there"...U.S. Dollar carry trade bets gone bad. Learn it. Know it. Live it. I really appreciate all of the posts on here as I find this forum really good at explaining short term changes in trend. After a crash sequence, no one remembers the noise, just what safety looks like. If you don't know what that is, you will figure it out soon enough. Thanks Yelnick.

[yelnick]

KRG, let's say the Santa Rally goes to the 50% retrace in the S&P of 1121, and somewhere around 10700 in the Dow. Then wave 2 or B or whatever we want to label the Obama Hope Rally is done. The US Peso has bottomed for the moment and heads towards Dx90. Gold drops to $700 and bonds drop as well as the long bond rate heads towards 5%. Mortgages edge up and the real estate boomlet is shown to be nothing. Commercial real estate continues to plunge and the next phase of the credit crisis emerges. The Yield Curve remains steep as the Fed keeps short term rates and interbank rates unusually low. The economic recovery begins to sputter as banks still don't lend to small business. More mid-tier banks fail.

In this environment government stimulus will appear to have little effect, and public support for massive obligations (healthcare) or taxes (carbon) will evaporate. Unemployment will remain sticky if not get worse. Euroland will begin to have more problems at the edges (Greece, Spain, Ireland, the Baltics).

China's stimulus will also turn down, and the drop in exports will cause difficulties internally, which will be largely hidden from the West. China's loss of ability to continue to stockpile and build ghost cities will then hammer the commodity currencies like the AUD, NZD and the CAD.

Stagflation? Likely instead quite visible deflation as debt gets written off globally. Recovery turns to recession again, as it appears to be doing already in Japan. Pundits begin to remind everyone of the 1930 parallels - we thought the worst was over just as it began to accelerate. Governments have run out of bullets. The Fed appears powerless. Obamavilles start springing up.

Perhaps then Volcker is brought out of whatever gulag he had been hidden in. And talk of a rate rise with a tax cut fills the air.

[KRG]

Y:

You are right. Doesn't sound like stagflation at all.. I was only wondering how interest rates can go up while assets get sold off in a deflationary environment.. May be the high interest rates (or a steep yield curve) is required merely to get foreigners fund the US deficits! And high interest rates in countries like ours (India) where food inflation is running wild...

cheers

[TC]

"Governments have run out of bullets. The Fed appears powerless." - Yelnick

I must say that that is a most interesting claim, given that none of the Elliott Wavers here (including yourself) thought that the market would ever see 10,500 again in the Dow, or that GDP would be where it is today; hence your short positions back in August with the likes of Prechter. Let's face it, nearly all of the "perma-bears" had us already breaking the 666 lows by now and the economy in Depression with food lines cropping up everywhere. That obviously hasn't happened.

The bottom line is that they've all been WRONG.
And they have severely underestimated the power of the FED.
1998? 2003? 2008???

Even "Gloom & Doomer" Marc Faber has admitted to underestimating the power of the FED!

[JT]

Dollar is surging today and yet Crude is +$1.00 and every commodity related stock on the board is up nicely... from coal to steel to nat-gas to drilling. So much for the "Gloom & Doom" of the dollar "carry" trade being unwound. LOL!

[Michael]

Yeah, if you've been short CLF, CNX, JOYG, POT, DO or RIG you are feeling a lot of PAIN. No doubt about it.

[yelnick]

TC, you may be confusing me with some other ewaver. On Jan 2 2009 I made 10 predictions. Here are the first two:

A Hope Rally to Dow10500 (SP1100) by this summer
A Retest of the Nov Lows (Dow7449, SP741) by Feb
http://yelnick.typepad.com/yelnick/2009/01/predictions-2009.html

When the rally began to plateau in late August, I went bearish. Shame on me I suppose. Market turned out to be less bullish than I had thought it would be in the retrace after the fall last year.  I then thought the sharp wave down to Nov2 would be the end, although also noted it could be an X wave that would go deeper. http://yelnick.typepad.com/yelnick/2009/11/last-chance-is-about-over-.html . Shame on me again. 

[vipul garg]

physicists believe that at turning points say creation/annihilation /big bang etc. the standard set of rules breakdown.
similarly when the market experiences such a breakdown of rules and limits and capitulates, it marks a turning point.
thats what we had in spx at 667 and a lot of other markets.
a breakdown of rules and limits .

this implies that those levels will not be seen again in forseeable future.
thats why i say that spx has a floor at 750 .

[joe]

You got this about right so far Yelnik - close enough.

Joe

[joe]

You see the dollar! Roger got this on the nose.

I think some companies forward earnings need new guidance.

Joe

[Bob]

market continuing to surge even with $51 BILLION in bank equity offerings today. Anyone see crude oil +2.00 today? How about the coal and nat-gas and energy stocks SURGING today? Does anyone really TRADE here on Planet Yelnick, or do people simply enjoy losing all of their capital playing the Elliott Wave game of "Pick the Top"?

[DG]

Does anyone really TRADE here on Planet Yelnick, or do people simply enjoy losing all of their capital playing the Elliott Wave game of "Pick the Top"?

Posted by: Bob | Wednesday, December 16, 2009 at 08:25 AM

Hey, bro, feel free to stop stopping by. I mean, it's not my blog or anything, but I gotta ask who appointed you overseer of everyone's trading?

Don't like the way I trade? Ask me if I give a f*ck. Go ahead, ask.

[DG]

Does anyone really TRADE here on Planet Yelnick

One other thing, Bob, is that if your goal is to impress people with your trading prowess, that's best done by announcing what you think is going to happen BEFORE it happens. Yes, anyone with quote access can see what's happening with crude now that it's happening, but if it makes you feel smart to let us know that crude is up $2, knock yourself out. Had you alerted us YESTERDAY that it'd be up $2 TODAY, then you'd actually have added some value to the site other than hot air.

[DG]

In the spirit of real-time forecasting, my wave count has 1121.28 to 1122.13 SPX as the limit for this rally. We'll see.

Posted by: DG | Monday, December 14, 2009 at 05:44 PM

Not saying it WILL hold, but so far this is holding.

If we take out 1106.8 SPX before tomorrow afternoon, we might be in a larger-degree correction of the move up since November's lows. That puts 1085 in play.

[DG]

If we take out 1106.8 SPX before tomorrow afternoon, we might be in a larger-degree correction of the move up since November's lows. That puts 1085 in play.

Posted by: DG | Wednesday, December 16, 2009 at 03:54 PM

Step-by-step we are doing all the right things for a top to be in.