This week is the start of the end of the year rally that everyone has been predicting. That doesn’t mean I believe that the market is going to rally from here till New Years going straight up. We simply came into this week with an oversold stock market condition following the October and November drop.
So the market got some footing on Monday to explode on Wednesday, but how long can the rally last?
I did an interview with Jim Goddard of howestreet.com during yesterday’s rally to give my take on what to expect now. You can listen to it by going here:
Now many stocks have completely crashed since the market peak of September and are not going to rally back up to their highs, but they look like they could bounce for a few weeks from here.
I’m not going to try to predict how long the rally will last based on nothing but yesterday’s action. It could be a few days or two or three weeks, but we have some obvious resistance levels on the S&P 500 now and the overall trends give us an idea of what is to come.
The daily stochastics on the S&P 500 were oversold going into this week and gave a buy signal after yesterday’s rally sparked by a dovish Fed Chairman making remarks taken to suggest that after the December Fed hike there probably won’t be but one next year.
The S&P 500 has resistance at the November highs now, which also are the 2/3’s retracement point of the October low and September high. I’m looking for the market to go to that and then drift into the end of the year. I wouldn’t be shocked if it doesn’t go through 2800 and then spend several weeks right above it to stall out.
Many of the broken stocks also look like they are ready to put on oversold bounces that could last a few weeks. But once they finish I’d look for them to go back down to their recent lows and probably through them in 2019.
For instance, take a look at NVDA:
A move up to the $170-$190 area for NVDA could easily happen in December. That would be a nice point swing for traders who catch it, but would not represent a new bull market for NVDA, but a mere bounce that would lead more declines in 2019.
Notice that when NVDA fell to $180 in October it bounced back up to $220 in November and then crashed again. Dead cat bounces on broken stocks excite people and cause many to chase, but are only short-term trades and in the end make for better entry points to use in betting against stocks like this instead of going long them.
And we can say the same for NFLX.
NFLX stochastics are poised to turn up above 20, which would suggest a dead cat bounce up to the area of its moving averages is likely. Like NVDA this stock also bounced in November and fell again.
I had been short NFLX since September, but took profits on my position in it yesterday.
I’m looking to re-enter again in a few weeks.
And finally, let’s take a look at AAPL.
Apple stock is still way off its highs. Yes, it can rally back up to $190 or even $200 from here, but if it does it will still be a damaged stock and the rally would lead to another decline for at least a retest of its recent lows once its over.
So in sum, I do think we are seeing a market rally begin this week driven by bounces in many oversold stocks. These three are just examples of what the bulk of the Nasdaq 100 stocks look like now.
This can bring some gains for traders nimble enough to jump on, but the excitement and more bullish predictions you know will come from so many will mask the problems inside the stock market that will reappear again in time.
But the Christmas rally is starting now – sooner than usual.
Seasonally the market goes up Thanksgiving week and afterwards typically pauses for one or two weeks to rally into the end of the year.
It’s doing the rally now – which means it’s likely to end sooner than the typical seasonal pattern too, but enjoy it for now.
To listen to the Goddard interview go here:
I’m not really into chasing stocks and yelling buy after a stock has a big up day, and there are sectors that I think are going to benefit next year from the emerging new FOMC cycle.
When you play a rally like this you must have a plan on how to take profits and not just react to the news.
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