Santa Rally Has Legs

Normally the Santa Rally continues for the first week of the new year, then pauses. This one looks stronger than that. I stand by my prediction from last night, that we are likely to have the Hope Rally continue into mid-Feb before peaking. After that comes the Change market. The major ewave pundits have had to scramble a bit, so lets look at their modified wave counts.

Tony Caldero was on edge Friday with his count, as the S&P crossed into the top of his wave 1, something a wave 4 shouldn't do. Tonight he shrugged it off, saying:

Today's rally confirmed the SPX wave 4 low on friday at 1115. We updated the hourly chart accordingly. Yes, there was a slight overlap between Wave 1 at SPX 1116 and Wave 4 at SPX 1115. Yet, OEW did not confirm the overlap in the SPX, only the overlap in the DOW. The hourly charts can get just a bit sloppy at times. Once the OEW 1133 pivot is cleared the market should rally near the long term pivot at 1168. If this new year enthusiasm continues, it could happen this week.

Neely has been squirrely of late, and today he had two counts: the end is very close, or we run hard up to Sp1200. Not much to do with that.

The STU has morphed their expanding triangle into a symmetrical triangle. This does not surprise me, nor should it my readers, since I have twice commented (most recently in First Look at 2010 Stocks) how their expanding triangle could be modified into a more normal form. They get there by making the end of leg A where they had leg C, as I suggested (although they get there in a slightly different way), and then they end the triangle at the Dec18 start of a strong move up. The implication is that the strong move through Christmas was a wave [i] of the final C wave, and the correction last week a wave [ii]. That makes this week the kickoff to wave [iii]. If so, it should be a pretty strong move and go for several weeks at least.

In contrast, Tony C would have us instead in wave [v] of the final C wave (the difference is Tony started his wave where the STU chart below has a leg C of the symmetrical triangle). The STU has an alt count which fixes Tony C's overlap issue and fits as well: an ending diagonal that started at that leg C below. The corrective wave B would be recounted as a flat, not a triangle, itself with a small ending diagonal to make the overlapping wave structure of leg C work as a "5" not a "3" wave. Since ending diagonals are relatively rare, they put this as lower odds. 

My take: when ewave counts break and need to be recast, even in a minor way (Tony C's count being redone as an ending diagonal), it usually signals that something else is going on. Breadth today was pretty strong. Sure, it can be attributed to year-end tax planning last year, and jumping in this year. If so, the upside momentum should fade by the end of this week, in classic Santa Rally fashion. More likely it means the Hope Rally has a ways to go before the Change Market takes over. 

Several things to watch:

• A quick fade of this rally means it is not in a wave [iii] and increase the chance of a top this week
• The leaders on the way up usually signal the way down. Watch AAPL and GOOG tomorrow
• Naz had a gap up today. If it gets filled relatively quickly, it would be considered an exhaustion gap, and the Naz may peak first and lead the Change Market down
• The USD is hovering rather than correcting, which suggests it may rise again over the next few weeks, pressuring stocks. If it turns down towards Dx76, watch for sticks to soar
• The Treasury has key auctions this week which might drive bond rates higher, pressuring stocks. If they go well, watch for stocks to soar
• Hope has returned in optimism over the strength of the recovery, and we might see flash estimates of a much stronger Q4 (consensus was 4% +/- 0.5%), which will bolster the rally

Financials and Tech led the rally up, and Financials have been lagging since November while Tech has soared. Today Amazon was down. I think it a short, so am not surprised; but now watch AAPL and GOOG, who both have big announcements tomorrow: GOOG their NexusOne phone, AAPL their Tablet, leaked to the WSJ in a counter-PR move to GOOG. Will their stocks rise into the announcements and fade after? If so, it should drive the Naz back through their gap up today. Hope gets exhausted, and Change is on its way. 

Comments

[Milen]

I think Yelnick has the best take, and recommendations to watch. However,it doesn't matter which count is correct. The signs, that the market rally is running out of steam is a fact. It’s just a matter of time. Well, important tops are usually a process, not a one day event. Money first flows from more risky assets to more conservative. Then eventually it flees to bonds. And then it goes to cash equivalents. All that takes time. It doesn’t occur from one day to the next.

[TC]

Milen,

Given that you conveniently ignore providing one single FACT that supports your claim that the market rally "is running out of steam" I find it hard to believe anything that you say.

[Michael]

Yelnick - - - Saying that Glenn Neely has been rather "squirrely" is being far too kind. He's speaking out of BOTH sides of his mouth with the proverbial . . . "Could go down, but could also blast up to 1200".

How can anyone trade off that information?

[Captain Obvious]

How can anyone trade off that information?

I'm just guessing here, but maybe that's why Neely isn't currently recommending any trades.

[Michael]

If you are a TRADER why would you not want to take advantage of an 85 point rally in the S&P up to 1200 if your Neowave count can make a case for such a move?

Care to answer that one, Captain Obvious?
:)

[TC]

I must admit, that Neely isn't making a whole lot of sense right now. I believe that that he was calling for a rally to "at least 1150" about a week ago before Wave E runs out of time.

He now claims that the S&P must either soar upward this week, collapse, OR do nothing . . . which negates both scenarios.

And people pay for this stuff?

[Captain Obvious]

If you are a TRADER why would you not want to take advantage of an 85 point rally in the S&P up to 1200 if your Neowave count can make a case for such a move?

You'd have to ask Neely for a specific answer, but my guess is that he'd say that the risk-reward isn't favorable for the placement of a good stop. IF the 85 point rally comes to pass, it's only a missed opportunity. Since opportunities come along all the time in the market, missing one isn't a big deal, unless you're trading for that day's daily bread or something, which is probably imprudent.

[TC]

Captain,

Neely says that he is ALSO looking for the FIRST MAJOR correction since last July. Thus, he is willing to sell short the March S&P on a sell-stop down at 1083.50 just in case a dramatic sell-off occurs, using 1131.25 as a stop-loss.

Interestingly enough, the trade above risks 47.75 S&P points.

But (in your mind) the upside to a potential of 1200 doesn't provide a favorable placement for a good stop?

Why not use last Thursday's low at 1115.10 SPX?

[Captain Obvious]

But (in your mind) the upside to a potential of 1200 doesn't provide a favorable placement for a good stop?

Why not use last Thursday's low at 1115.10 SPX?

In Neely's mind, it doesn't and he may (is?) see something different from what you or I see, whether that "something different" is real or not. Yes, last Thursday's low would be a place where an objective stop-loss could be set, though.

[Michael]

My "Stock of the Year" continues to act well. This is just the beginning. Exact Sciences (EXAS).

[joe]

I do hope everryone had a really good New Year - and I think this year could be a pretty good trading year.

Yelnik - your overall analysis is very good - if we have completed this corrective wave or are about to complete it 30 S&P points higher in a few weeks - it really doesn't matter in the bigger picture.

I do think some event in Q1 will be followed by a more dramatic event at end Q3 - as you say - as hope becomes change. If we can just trade these moves...

Again - a very happy New Year to everyone.

Joe

[Anon]

Apropos of nothing, http://tinyurl.com/yea4yry

[cloudslicer]

Has anybody been watching TYX?

We are now near to testing a MULTI-DECADE channel line.

[Hank Wernicki]

There are no proven market theories only proven trading systems.

Find one and avoid reading / suffering all the grieve.

[joe]

Wouldn't a trading system, by definition, imply a market theory?

Joe

[twitter.com/DrBubb]

Here's Apple/AAPL, which shows this last leg up, is on light volume
http://img20.imageshack.us/img20/1873/aa1y.gif

No "push" this time, just a V-shaped rise on fading volume, which I reckon is long term bearish.
If the correction comes with volume, it may morph into something big

[KRG]

"He now claims that the S&P must either soar upward this week, collapse, OR do nothing . . . which negates both scenarios."

For each of the scenarios listed above there appears to be a specific neo-wave count with different possibilities in each case

Cheers

[Douala D]

"PY"... Something you may find interesting. UK Telegraph International Business Editor, Ambrose Evens-Pritchard, raises the specter of a global capital market meltdown in 2010. He lays it out. Not pretty! And finishes with this: "The dollar rally will gather pace. America's economy – though sick – will shine within the even sicker OECD club..... By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives."

Link: http://tinyurl.com/ybe9sxr

[Sendo]

Neely talks like a bad broker, S&P is either up, down or go sideway... its all BS.... anyone who has any intelligence will not say something like that.

[Michael]

Coal stocks continue to surge . . .

ACI, ANR, BTU, CNX, MEE, and CLF.

[Captain Obvious]

Neely talks like a bad broker, S&P is either up, down or go sideway... its all BS.... anyone who has any intelligence will not say something like that.

I was always told that it's very intelligent to admit you don't know something when you don't know it.

[Sendo]

Captain.... maybe afterall predictions or forecasting are for fools... ie: Neely is a fool after he declared the top sometime in summer.

[Captain Obvious]

Captain.... maybe afterall predictions or forecasting are for fools

It depends on the process used to reach the forecasted conclusion. If I forecast that the sun will rise in the west tomorrow because I've "got a hunch it wants to do something different", that's foolish. If I forecast that it will rise in the east because "it's done that every day of history so far", that's a reasonable forecast.

But, that's an easy one, of course.

Anyone who studies Decision Science will tell you that the process you use to reach your conclusions is as important or more important than the conclusions themselves. Since we are not omniscient, that is the best people can do.

I will tell you this. Neely outperforms "buy and hold" and isn't that, on one level, what trading is about? Otherwise, just "buy and hold", right?

[Michael]

My first boss, Victor Sperandeo once told me to "Observe what is happening and assume that it will continue."

In other words, the TREND is your friend.

I believe that there is a lot of significant value in this rather simplistic statement that can keep a trader out of trouble . . . but that only works if he doesn't have a top or bottom picking Ego.

[Captain Obvious]

he doesn't have a top or bottom picking Ego.

So, every trader trying to pick a top or bottom is doing so out of ego?

[Michael]

Captain,

No, I did not say that.

But given how many Elliott Wavers have been trying to "Pick the Top" ( bloggers like Binve, Daneric, Kenny,and newsletter writers like Prechter, etc. ) since last August I think that my statement makes a lot of sense.

Equity markets and various stock market sectors spend an extraordinary amount of time TRENDING, especially given a low interest rate, excessive liquidity environment.

They do not spend a lot of time "reversing" trend. Thus, trying to chase such an absurd premise is pure folly in my opinion.

It is a "trait" that has very little to do with being a successful trader that consistently makes money. Anyone that trades every single day of the year and has actual "skin" in the game is fully aware of this.

[Captain Obvious]

Equity markets and various stock market sectors spend an extraordinary amount of time TRENDING, especially given a low interest rate, excessive liquidity environment.

They do not spend a lot of time "reversing" trend. Thus, trying to chase such an absurd premise is pure folly in my opinion.

Gee, the market doesn't spend a lot of its time reversing? Let it not be said that you don't have a little Captain in you, only I am referring to Captain Obvious, not Captain Morgan.

What did you do in October 2007, when the market broke to a new price high? Was that the sign of a continued trend? How would you have distinguished between that breakout, which was obviously a peak, and this recent breakout? Other than by hindsight, obviously.

[Michael]

Captain,

I use several moving averages ( and the second derivatives of each ) to identify and confirm the TREND on an hourly, daily, weekly, and monthly basis.

Divergences showed up in the rates of change and the relationships between my moving averages which lead me to lighten up positions.

The trend change was finally confirmed when a break of all moving averages occured, at which point I stopped playing the long side.

It's a rather simple system that identifies and confirms the trend. I've developed this technical system with the help of a friend of mine over the last two decades.

It has worked extremely well for me, and has kept me IN positions and correctly identifying the TREND longer than I normally would have given my very short-term trading nature, developed over the course of 10 years as a commodity floor trader.

[Hank Wernicki]

Map the Market, and Don't make the Market fit the Map !!

[Michael]

For example, take a look at a stock in the coal sector such as Massey (MEE).

Once the stock got back over several MA's in early November and held the low of 28.26 of Oct. 28th, it has been in a very strong uptrend and has not once broken below my "third" MA, thereby keeping the uptrend intact.

The stock is now trading $48 today.

Hank is right.
Simply "map" the market and listen to what it is trying to tell you, and DO NOT FIT THE MARKET to the map!

:)