Year End Picture for U.S. Market Shows Bullish Patterns

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Before the end of the year, the technical picture for major US stock indexes shows a couple of bullish patterns. The Dow Jones Index is approaching a 50 day moving average, which gives good long term indication. The 3 months chart below shows another bullish formation "Head and Shoulders". If we look at price indicators like RSI or MACD we can see bullish divergences for most of them.

Before this week started, bearish technicals signaled a descending pattern of lower highs. But this has been reversed by the higher high after Monday's rally.

Are we heading towards a year-end rally?

Comments

[Alex Trias:]

MACD is helpful, but notice the flag shaped formation on the VIX? The VIX is compressing at its' 50 day, like a kitty cat getting ready to pounce on some bullish equities traders. If the VIX spikes up, expect this to spook the pants off most bullish equities traders.
I'm going with the view that the VIX is more likely to fall at this point than to rally higher. And I'm going to continue to assume the VIX and the equities markets will remain inversely correlated, and that, accordingly, we could see a nice year end rally.
We are at an inflection point. I'd stay on the sidelines if I was trading, until a clear trend emerges - and it will within a few days.

By the same token, as a value investor, I don't care whether we see a rally into year end or not - I suspect the rally would peter out as folks re-test the 50 day EMA as resistance or support, and in any event, the 200 day EMA will act as stunning resistance, certainly smacking the market down for a while. Far too soon to call a bottom of the bear market from a technical standpoint, and from a valuation standpoint, who cares if you're at the bottom or not? Cheap is a bird in the hand, cheaper is two in the bush (unless you think earnings are poised to fall apart for an extended period - certainly possible).

2008 Dec 09 07:22 PM

[Capt "V":]

Weeeell, it could be a head and shoulders or it could be a case of lower lows and lower highs bumping up against the 50 day MA on yawner volume. I fear that lower lows are on the way---

2008 Dec 09 08:24 PM

[jepittman:]

I always thought the vix was determined by the market, not vice versa.

2008 Dec 09 09:00 PM

[Briggsy:]

The December 1st close looks like a genuine, bona fide higher low. We haven't seen one of those since the summer rally.

2008 Dec 09 09:47 PM