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Get Ready for a Six-Week Rally in Stocks

By Jeff Clark
Tuesday, November 13, 2012

Everything is falling into place for a year-end rally in the stock market.
Last week, we took a look at the U.S. Dollar Index. And we noted how it was zeroing in on the upside target we set for it a couple months ago.  
Since stocks tend to trade inverse to the dollar – or at least they have for the past few years – a peak in the Dollar Index should coincide with a bottom in the stock market.
Now, after last week's decline, the S&P 500 has hit our downside objective... 
There may still be a little more room for stocks to fall. But if you think we're going to get a traditional "Santa Claus" rally, this is a pretty good time to start preparing for it.
Take a look at this updated 60-minute chart of the S&P 500...
 60 Minute Chart of the S&P 500
The head-and-shoulders pattern we highlighted last month played out. The S&P 500 is now sitting right on support around 1,378. From here, one of two things could happen... Stocks could bounce and kick off a year-end rally... Or support could fail, and the index could drop toward stronger support at 1,360.
Stocks are plenty oversold now to justify a bounce. It's reasonable for traders to take a small position here to test the waters. If the S&P 500 can rally back above 1,400, it's a safe bet the recent decline phase is over... and Santa Claus is on his way.
On the other hand, a drop down to 1,360 would push a number of technical indicators into "extreme" oversold territory. It would stretch the proverbial rubber band about as far as it could go... and set the stage for a stronger bounce higher.
As a trader, I like the idea of buying a little right here... just in case. But I love the idea of buying near 1,360. If Santa shows up this year, he'll likely pull the S&P 500 back up toward 1,430 – the broken neckline of the head-and-shoulders pattern. That would present a solid rally for the next six weeks.
It's time to get ready for it.
Best regards and good trading, 
Jeff Clark

Further Reading:

Jeff says paying close attention to the dollar is a great way to know when to jump into stocks. Learn more about it here: How to Know When Stocks Will Stage a Year-End Rally.
There's another sector Jeff says could lead a year-end rally in stocks. A sign of strength in these stocks will provide another clue that a year-end rally is ready to unfold. Read more here.

In The Daily Crux
Market Notes
The euro looks ready for another "leg down"... currency touches a fresh two-month low.
Generic drugmaker Mylan ignores market weakness… shares jump to a nine-year high.
Biotech giant Gilead breaks out to an all-time high after announcing new hepatitis drug results.
Utility stocks continue their "trend reversal"... sector fund XLU sinks to a fresh six-month low.
Market Watch
Symbol Price
S&P 500 1380.03 +0.0% +9.2%
Oil (USO) 31.59 -0.4% -17.3%
Gold (GLD) 167.45 -0.2% -3.7%
Silver (SLV) 31.37 -0.5% -7.0%
U.S. Dollar 81.06 +0.0% +5.4%
Euro 1.27 -0.1% -7.7%
Volatility (^VIX) 16.68 -10.4% -44.5%
Gold Stocks (^HUI) 475.12 -1.3% -21.3%
10-Year Yield 1.61 +0.0% -21.8%

World ETFs
Symbol Price
Singapore (EWS) 13.13 +0.6% +15.2%
USA (SPY) 138.27 +0.1% +11.5%
S. Africa (EZA) 66.23 +0.1% +6.8%
S. Korea (EWY) 57.68 +0.6% +6.0%
Taiwan (EWT) 12.97 +0.3% +5.6%
Canada (EWC) 27.88 +0.1% +2.3%
China (FXI) 36.55 +0.3% -0.7%
Japan (EWJ) 8.86 -1.0% -2.9%
Israel (ISL) 12.75 -0.7% -4.4%
India (IFN) 22.33 -0.3% -4.9%
Lat.America (ILF) 41.38 -0.4% -6.5%
Russia (TRF) 14.05 +0.4% -13.8%

Sector ETFs
Symbol Price
Construction (PKB) 16.02 -1.3% +37.8%
Media (PBS) 15.92 -0.5% +22.1%
Health Care (IYH) 82.31 +0.5% +20.1%
Financials (IYF) 57.87 +0.1% +19.0%
Consumer Svcs (IYC) 84.05 -0.1% +18.8%
Biotech (PBE) 22.48 +1.0% +16.1%
Real Estate (IYR) 62.88 -0.2% +15.7%
Retail (PMR) 24.78 -0.3% +15.1%
Insurance (PIC) 16.91 -1.2% +13.8%
Telecom (IYZ) 23.44 +0.0% +13.1%
Water (PHO) 19.21 -0.4% +12.9%
Industrials (IYJ) 70.17 +0.3% +11.8%
Defense (PPA) 20.01 +0.0% +11.2%
Big Tech (QQQQ) 63.42 0.0% +10.8%
Software (PSJ) 26.34 -0.2% +5.5%
Transportation (IYT) 89.84 +0.8% +2.2%
Utilities (XLU) 34.38 -0.8% +0.3%
Basic Mat (IYM) 65.78 -0.1% -1.9%
Semis (PSI) 13.55 +0.0% -7.3%
Nanotech (PXN) 5.66 +0.2% -9.8%
Alt. Energy (PBW) 3.75 -0.5% -32.5%

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