“We mentioned a few weeks ago once the indexes broke out of their trading ranges we expected a rally to last until mid-December. All of our bullish indicators are playing out well as the Dow Theory trends we covered in early November played out like a fiddle and was our first sign a break out of a sticky trading range was coming. The Monday/ Friday closes have also been great clues but the Dow did slip this past Friday. A higher Monday might make this a non-issue but if the blue-chips close lower on Monday, the bears could be getting ready for an attack.
We have talked about the small-caps leading the way higher on a breakout and that trend is also playing out like we penciled-in. The Russell 2000 also shows strength from mid-December into January and will shape the “January Effect”. We will discuss this historical trend in the next week or two along with the Santa Claus rally that DOES NOT start UNTIL AFTER Christmas. The suit-and-ties and talking heads get this wrong every year and can get disappointed on down days ahead of Christmas. They will say the Santa rally is fading or isn’t coming but if there is one it will come during the last 5 days of the month and the first 2 trading days of the year.
If the aforementioned trends start to reverse, we will know the bears are hungry. On the flip side, the bulls could be setting some traps ahead of the blow-off the roof top type rally that often accompany an over-extended bull market. This means while there could be some weakness this week, as long as support holds, the market should chug along nicely into yearend.
Either way, the action promises to be exciting in December and while our chips are on the bulls, we need to protect them and start cashing them in if there is a pullback and support starts to crack.” (from 12/1/2013 Weekly Wrap…)
The bears left some good clues on Black Friday that this past week would be volatile and we warned a test to support could come following a run by the bulls to fresh all-time highs.
The week started off with a lower Monday and a test to the first wave of support followed by a close below on Tuesday. Wednesday’s pullback got the second layers of support in play and our downside targets were right on point as they also held.
Thursday’s action was choppy and the final numbers favored the bears heading into Friday’s Nonfarm Payroll report. The big negative was the VIX ending above 15. However, there were also some bullish signs as the small-caps finished the day higher while the major indexes held support with higher lows than Wednesday.
This gave us an inkling the bulls might rebound after four days of selling pressure and they didn’t let us down as Friday’s rebound nearly gave the bulls the weekly win. (continued…)
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