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The Rally We've Been Waiting For?


Or will channels break to the downside on heavy volume?

Turns out that yesterday's decline wasn't as virulent as the point loss suggested. The volume was relatively light, and the internals held up better than expected.

Here's a closer look at the ascending channels that I've been talking about (S&P 500: The Good, the Bad and the Ugly). I haven't seen them mentioned elsewhere, but to me the pattern is obvious.

A move higher can lead to the elusive 940 level on the S&P 500; a heavy volume break can lead to a decline and maybe a test of the November lows. (Minyan Mailbag: The Hunt for Green October).

Here's the Dow:

Click to enlarge

And a closer look at the S&P 500:

Click to enlarge

We might have yet another try to reach the top of the channel, which remains in the vicinity of the 940 target. Will that be the Santa rally we've all have been waiting for?

Here are my Market Thoughts from back in June. While the numbers on the right have changed dramatically, the message is as pertinent as it was back then:

"From the charts of Dow and S&P below, the channel breaks are evident. The Dow was the first to break and S&P, staggering under the weight of financials soon joined in.

Click to enlarge

"Tops are usually a process, and are best recognized in hindsight. Have we begun our descent today? As the battle has raged on, few remain standing: Energy, materials, select technology stocks. Sure, the rally can go on for some more time and percentage points, but prudence dictates that trading with abandon at this time doesn't offer the best risk/reward scenario.

"The churning that takes place at such indecisive moments can wreck havoc with personal trading accounts. Going long one day, going short another; trying to bottle (battle?) this genie of extreme volatility can be tricky and self-sabotaging. It's easy at such a juncture to be blinded by intraday market gyrations and visualize patterns where none may exist.

"Trade small, trade conservatively, and keep tight stops. Let the skies clear before you take chances and make your next big commitment… We have to remain alert to the possibility that the NASDAQ and Russell will join the Dow and S&P in breaking their recent uptrend."

Of course, past price patterns are no guarantee of future price failures - unless, of course, the channels clearly break to the downside on heavy volume.
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