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Dreaming Of A White Christmas

Dec. 12, 2014 3:47 PM ET
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Markets kept collapsing exacerbated by fear of deflation caused by persistent oil plunge and the usual budget bickering in Congress that can result in Government Shutdown Part II.

Is the Santa Claus Rally already dead, no longer the way it used to be if oil just keep going down and another government shutdown happens again perhaps much longer than the last time it happened in October 2013?

We simply do not know what the future holds. What we can do is either dream of a White Christmas or better still try to improve our entry timing to minimize potential losses and possibly maximize profits:

>> SnP500 Daily: drive.google.com/file/d/0B9dBZPXNckXYMS1...

>> GDow Daily: drive.google.com/file/d/0B9dBZPXNckXYX05...

Spx kept going down and now in it's most important support which is the Double Top. Once price collapse below the breakout support; many traders prefer unloading their long positions for fear of sustained collapse. The 50ma remains what many daytraders hope SnP500 will re-test in order for them to get back into the saddle. For the Fibonacci experts; they prefer at least 38.2% to 50% retrace of the rally since majority of extremely shallow pullbacks tend to be unsustainable. Each to his/r own.

GDow remains the major limiting factor for the US markets as perceived turmoils and slowing economies abroad persisted to date aggravated by the seemingly super-strong dollar that can negate the benefits from plunging oil prices. Thus unless the US$ makes some pullback down and/or crude oil finds some support; the economic weakness abroad are expected to remain the predominant theme and GDow should keep going down. A major pullback up for GDow should then result in a strong rally for SnP500 to new highs.

>> SnP500 Weekly Divergence: drive.google.com/file/d/0B9dBZPXNckXYNnR...

>> VIX Fear Gauge: drive.google.com/file/d/0B9dBZPXNckXYODV...

SnP500 Aggressive Scenario remains valid until proven wrong and this recent divergence sell trigger should be the warning sign of possible multi-month correction of 10-20+% comparable to what happened in Feb to Oct 2011 for the blue iv-th wave down. With the Santa Claus Rally known to kick in hard during the second half of December, this scenario is still considered low probability. Santa Rally has 92% success rate since the 1980's and that's the default highest probability scenario for the moment.

VIX kept spiking for reasons nobody really knows except to keep guessing or find correlations. Correlations are oil, interest rates, strong dollar, etc. Others kept guessing another government shutdown is going to happen. At any rate, levels are labeled for us to gauge how far this most recent fear spike should go or not go.

==============

Trading Strategies:

Santa Claus Rally remains the better daytrading strategy to date despite the failure of the potential intraday Expanded Flat to support another rally early this week.

<< Failed 5min Trade Setup: drive.google.com/file/d/0B9dBZPXNckXYbzd...

<< Tape Reading Analysis: drive.google.com/file/d/0B9dBZPXNckXYbHM...

The intraday trade setup never got a chance to succeed as instead of making a higher low a-b-c down SnP500 made a lower low a-b-c before ramping up on Thursday. As specified in the Addendum section of Santa is Coming Instablog; the bears got a slight upper hand unless Spx can rally back toward 2060.60. Suffice to say that the bulls failed to gain ground again:

>> Tape Reading Bigger Picture: drive.google.com/file/d/0B9dBZPXNckXYZXJ...

>> SnP500 60min Chart: drive.google.com/file/d/0B9dBZPXNckXYU1k...

That's what the experts are looking at for at least a few weeks now. Uvol/Dvol spiked up but in subsequent sessions it can't go above the +3.00 threshold and thus becomes vulnerable to sell-offs as traders will avoid going long until the breadth finally over-comes the +3 resistance or some bullish pattern presents itself.

The potential Expanded Flat for ES proved unable to provide the upside catalyst early this week and it's failure provided the catalyst for the massive collapse of the Uvol/Dvol. But when Uvol/Dvol collapsed hard, there is now a bullish opportunity for traders to execute a Divergence Buy Signal if it triggers.

Trading strategy for early birds is of course to buy a recovery back above -3.00 and sell some positions on a re-test of the +3 resistance. If the markets kept rallying toward first week of January 2015 as Santa should; then close the trade by then for profit taking purposes.

Ideally, buying early next week once (or rather IF) congress approves their budget for next year is the conservative buy strategy as it removes one leg of reasons why traders/investors are unwilling to buy the Santa Rally early this week. If crude oil kept plunging, it may still be able to exert downside pressures but at least panic selling that a government shutdown is removed from the equation.

For intraday traders; modus operadi remains either:

1.) Enter the Divergence Buy Signals on intraday charts for bottom fishing;

2.) Buy at 127.2% to 138.2% Fibonacci Reversal Levels for those who know how to execute this type of contrarian trade. Preferably with a divergence buy signal to improve probability of success; or

3.) Wait for a i-ii-iii-iv-v rally on the 5 to 15min chart then buy a slow-grinding a-b-c down. Avoid buying if the intraday run down is not boringly slow or becomes aggressive selling. SOP hard stop is of course the last low.

Those strategies are illustrated on the above intraday charts and in innumerable Instablogs in the past. This one is no different. Important part is try to minimize potential losses and possibly maximize profits if the trade becomes successful.

* Again, this trade is suitable for the more nimble daytraders who can react to unpredictable market gyrations caused by daily events.

There is only 2 to 3 weeks window of opportunity for the Santa Rally and thus swing traders and/or medium-term traders who prefer to hold positions for several weeks to several months need not be greedy for such a short-term trade specially those who already bought positions in October 20 based on the Oct 17 Instablog Trading Strategy. Best course of action for them is to simply nurse their swing trades and/or medium-term trades to maturity based mostly on targets specified on the weekly charts.

Definitely not suitable for investors.

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