SPX, NDX, and Dow Update: Who Wants to Fade Santa?

From a technical standpoint, nothing happened yesterday.  The markets may as well have been closed.  Lots of people are talking about the bullish "inverted hammer" candlestick (so named because it looks like a candlestick) on the daily charts, but Friday's action is needed to confirm the bullish implications of this pattern. 

Next week is the last trading week before Christmas, and traditionally it's a low volume week with a bullish bias.  Of course, the week of Thanksgiving would be described the same way, and this year saw a pretty steep decline through Thanksgiving week (as predicted here). 

Another interesting seasonal fact is that the Volatility Index (VIX) often bottoms in December.  In fact, during many years, the low of the entire year (or very close) in VIX is reached shortly before Christmas (recent examples: 2003, 2004, 2006, 2009, 2010).  So who wants to fade Santa?

Frankly, I'm scared of Santa.  Always have been.  Buried away somewhere, I have a picture of me as a baby, bawling my eyes out, while I'm being held by a mall Santa who -- judging by his facial expression -- clearly felt that this particular situation hadn't been thoroughly discussed during his training at Mall Santa School.  So it's hard to get too bearish about the week before Christmas -- but I'm going to suggest it anyway.

The caveat here is that many markets are reaching levels which could generate a strong bounce soon. Yesterday, I used the analogy of a stretched rubber band:  either it snaps back forcefully (possibly right into your face), or it breaks.  This is the position the market appears to be in, and, as of yet, no key intermediate levels have been violated on the downside -- at least not in the major averages; several minor averages have already broken some key support levels.

The charts are now in a position where it's very difficult to predict which situation will actually play out.  As I said, I favor the bearish resolution, but I have annotated the next chart to illustrate both potentials. 

The preferred count shows the decline as a series of first and second waves, which, if correct, should be the prelude to a big third wave decline.  The pressure is now on this count to perform or be eliminated.  Friday should see some early upside bias under the expectations of this count, but next week the market would need to sell off strongly.  If one were so inclined, Friday could provide some short entries with manageable stops (barring a huge gap up on Monday... now where have we seen that before?) and a lot of profit potential.

The bullish alternate count suggests the market will ultimately break above the October highs (before reversing to new lows).  A sustained upside break of the red trend channel would be first warning to be alert to the bullish alternate count, and trade above the red dashed knockout level would indicate new highs are very likely. 

The chart below uses the Dow Jones Industrial Average for form.

The next chart is the daily chart of the S&P 500 (SPX), and depicts the expectations of the bearish count over the short term.  Note that the market is currently trading just above a theoretically-important support zone.  The chart is annotated with "or (2)?" to show the expectations of where the bullish alternate count could top if it unfolded.

The final chart is the Nasdaq 100 (NDX), and it's the same chart I showed yesterday.  The NDX continues to act like the weaker sister here and is actually below important support.  One of the things I'd like to call attention to regarding this chart is that the count is much less vague than the SPX.  The NDX shows a very clearly defined A-B-C pattern, and I have a really hard time imagining that NDX has not already topped its Minor (2) wave.  In my mind, this lends credence to the argument that SPX and Dow have both topped as well.

In conclusion, I remain long and medium term bearish.  Short term, my current expectation is that the market probably won't grant the much-anticipated Santa rally to new highs, which it seems everyone is waiting for.  But there isn't any real confirmation yet either way, so it's prudent to remain alert to both scenarios... especially since Santa brings huge lumps of coal to investors who don't trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com