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Here Comes the Santa Rally


The market is perfectly positioned for a strong rally into the end of the year. Here's what to watch for which could negate that outlook -- plus, some education on Elliott Wave Theory.

Again, the market finds itself in a position where the bull and bear counts are both pointing in the same direction (up) presently, and this count also suggests higher prices still to come. Bulls do need to break the 1438 swing high to confirm -- hence the black "alt: (1)" annotation.

Now to cover why the market dictated this chart be adjusted in-between Wednesday and Monday. The overlap at 1420 created an issue for the old bear count -- which depicted a higher-degree c-wave rally -- and that issue is based on the fact that c-waves are always 5-wave moves. Within those 5-wave moves, waves 1 and 4 cannot cross paths (except in special cases, called ending diagonals). An ending diagonal appears highly unlikely, based on the shape of the move. So once the potential wave 4 moved into the price territory of wave 1 (below 1420), that told us the c-wave was off the table, and I changed the labels to reflect the next highest probability bear pattern. I have adjusted the labeling again slightly since yesterday (since the bear outlook remains my alternate, I am not really focusing on this chart in most updates).

Click to enlarge

Now we get into the preferred SPX outlook, which remains intermediate bullish. Bears should consider that the seasonality right now is very bullish, and that bullish seasonality also matches the price pattern I'm seeing as the most probable outcome (a continued rally to new highs).

At one point, I warned about sustained trade below 1420 because 1420 appeared to be the wave 1 high -- but 1420 lost its significance on Friday, because I was unable to reconcile the rally as a complete five-wave pattern. Since waves 1 and 4 can't cross paths, this told me that the decline into 1411 could not be a fourth wave. The overlap of 1420 suggested that it was instead another second wave (a very bullish pattern).

If this count is correct, bears should be super-cautious and nimble if they choose to get in front of this market. Nested third waves are very strong rallies, because they represent a "point of recognition" for the masses, wherein traders who were previously bearish suddenly realize the rally has real legs and isn't slowing down, and they are forced to cover short positions and/or chase the market higher. This creates a loop that feeds on itself -- each correction is bought and drives the market back up, and each push higher creates more need to chase.

Click to enlarge

Let's zoom in a bit on the 30-minute chart, which shows a breakout and back-test of a very bullish basing pattern (blue dashed line). The expectations of this pattern, at least as long as the market maintains the 1411 swing low, match the bullish wave count.

Click to enlarge

Finally, a quick update on the Philadelphia Bank Index (INDEXDJX:BKX). On November 30, I published a bullish trade trigger, with a target of 50.25 (about 3% up from the trigger) and that target was reached yesterday. The BKX is another index presenting a problem to the bear case, because no matter how you count the rally since November, you still end up with five-waves up... and that says it's unlikely that it's over yet.

Click to enlarge

In conclusion, on December 3, I wrote: "While there will surely be corrections along the way, I tend to think that bulls will probably get their Santa rally." It continues to look likely that the market is planning to continue its advance, and that it may actually pick up steam. I've focused on the bull outlook, but trade below 1411 would be the first indication that something more bearish could be afoot -- and the market always reserves the right to do something unexpected. But until then, I remain bullish, and presently believe the market is ultimately headed to new highs beyond 1474. Trade safe.

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No positions in stocks mentioned.
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