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A twilight zone visual

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Today is going to be a holiday shortened session as both the fixed income and equity markets close by 1:00pm. Many people will be scurrying around to spend time with family and get last minute Christmas gifts. Judging by the traffic coming in this morning, there are just a couple less folks at work today. Frankly, I would rather work than deal with the malls because they are a zoo this time of year (I wonder what the Zoo looks like in Minyanville - a bunch of freaky humans I bet).

Since the beginning of the month, I have tried to focus on how the market has entered the twilight zone. In the simplest technical terms this is the trading range market after an initial surge higher after an important low. This is the period where you can get near-term oversold rallies, but there are clear technical signs of lost momentum on intermediate-term indicators, which suggest any rallies would likely be brief and not be sustainable.

One of the oldest sayings is that a picture is worth a thousand words so lets get to it.

Exhibit 1 - The S&P 500 has become deeply oversold and appears to be turning positive

Exhibit 2 - The problem is the intermediate-term picture

Exhibit 3 - The tech heavy NAZ is even more oversold, but also could be suggesting bounce

Exhibit 4 - But alas, the same problem exist intermediate-term.

At this stage of the game, we don't necessarily need to decide whether or not the market is poised to see new lows next year (although that is my inclination), we just need to know the equity markets are set up for a snapback oversold rally in the context of an intermediate-term downtrend where momentum has been lost. As a result, simply don't expect too much once we retest the highs from a few weeks ago because there is unlikely to be enough momentum to carry it higher than that. Once the intermediate-term charts work their way closer to oversold, then a more significant rally would be possible - right now it just doesn't look that way.

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