We knew last week couldn’t possibly equal the week before which was one of the best weeks in recent memory. As it was the Dow just missed taking out the October high of 12284. Considering what Thursday looked like, this is almost miraculous. But we know by now there isn’t such thing as miracles in the stock market. That will show you this Santa rally means business. But do you know the date of the October bottom? It’s October 4. Do you know the low price of the Dow on that date? Its 10404. That’s right as in 10-4. That’s not a miracle, its Gann.
That was also in the 610 week window off the Dow top from 2000 so there’s lots of symmetry surrounding the October bottom. While that is ancient history now we are seeing the payoff of a market that refuses to have a meaningful selloff. Weak bears without follow through manifested again on Friday after the big bear candle on Thursday which was a setup handed to bears on a silver platter but they could not exploit such a fine opportunity. If you consider the new event on Friday where Great Britain refused to join the rest of the EU in a treaty that would impose sanctions and fines on debtor nations refusing to play along with strict austerity budget measures. All that does is complicate the process yet again which means this European merry-go-round continues to spill into 2012. If markets were hoping for an early Christmas present in the form of a European resolution they didn’t get it. However, they rallied anyway suggesting they are not focused on Europe as much as peace on earth. Let’s face it, this is December and it’s hard to get markets to have any real sustained selling just shy of Christmas.
This is an important week mostly because of the positioning of the SPX. Our chart of the week has the market at large as represented by the SPX as converging trend lines. One would think this is a triangle simply because of how we can so easily connect all the dots. When things get easy with markets they usually end up more complex so it’s not a given this is a triangle. Right now it works. If the market follows form prices should pullback to at least the middle of the range if not the rising line that has defended the 2 big lows. If prices stay in the range we likely don’t see a resolution to the pattern until the first week of January at which time it could break in either direction. However, it has a unique opportunity to violate to the upside if it isn’t a triangle. It’s either going to violate or it’s not. Seasonally it has a good chance but if there is one condition pouring cold water on the entire rally it would be the Shanghai market which has not participated at all in this rally and did not turn in its 261 day window last week. That’s a big problem for markets and China blew a major opportunity to put in a long term bottom. The mitigating news is that we are coming to the 161 day window by the middle of the week off the high from earlier this year. Should that one validate it could give us a trading leg as opposed to a long term reversal.
The currency situation is as confused as I’ve seen it in a long time. There is no clear indication so I can’t offer an opinion other than to say if the Dollar and the EUR-USD follow recent form this is going to a trend less week. It may turn out that way. The next big time window we have is on Friday which is the 161 window off the May top.
As good a day as Friday appeared to be there is still some question as to whether the market is about to breakthrough. We are watching 3 key areas. First of all, we believe this is a rally inspired by a turn in biotechnology. As of Friday, the bar was an inside day compared to Thursday which may mean the market isn’t ready yet. We also like the steel sector which had a promising day. Then we have the banks which overall only put in an inside day. But the area that looked really good on Friday was pharmaceuticals where several of those leaders did have outside days to the upside.
It’s important to see biotech participate in a Santa Claus rally because of all the market sectors, people still come to the stock market attempting to make a big score. Biotech represents risk and excitement. If participants can’t get excited over the holiday season, when exactly do they get excited?
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