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...
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 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.
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