Saturday Homework

The market continued to move sideways along resistance @ the 1240 level on the S&P 500 level. For the day, Friday, the open was 1243.63. The high was 1245.81. The low was 1239.87. The close was 1243.91. The close was higher than the open by a margin. For the week, the open was 1242.52. The high was 1246.73. The low was 1232.85. The close was 1243.91. The close was higher than the open.

Last week, I was looking for scenario number 3 to develop; i.e. a high made on December 13 or Mutual Fund Monday followed by a drop. Instead, the market moved sideways for the week. The Relative Strength Index (RSI) coasted along and closed @ the 66.77 level. This close was lower than the RSI reading earlier this week. So, we have a potential setup for negative divergence between the RSI and the price action on the S&P. However, I want to see a higher price action on the S&P 500 and a lower peak on the RSI before calling a top. I see some similarities between the price action this week and the price action during the week of January 11, 2010. During the week of January 11, the market had advanced on six days of up volume the previous week. Investors and traders might have projected those six days of gains during the week of January 1 into the week of January 11. Instead the market stalled out @ 1150 while the RSI made three lower peaks. This sideways price action on declining RSI readings was followed by a three-day drop during the week of January 19.

Because of this past pattern, I will be watching for the market on Monday and/or Tuesday to hit 1246 and record a third lower RSI reading. If I see this behavior, then I will be confident that the market will drop. Clearly, the outlandish bullish readings among investors suggest a correction is near.

The only wrinkle in this line of thinking is the season. We are approaching the traditional time for the Santa Claus rally. Because of those expectations, I am biased towards the market rocketing higher into the New Year. I have seen it happen before. But normally, the market rockets up from oversold conditions, not overbought conditions. We are arguably in the fifth Elliott Wave up. Rather than an up move, a decline is more logical.

Anyway, that's the tension between what I see (a drop ahead) and what I am biased to see (a crazy rocket move higher). Q: Will Santa come this year? Ho! Ho! Ho! I don't know. But I do know one thing--it is not a good time to buy right now. Nothing that I see in the market conditions says, "this market is going up, now!"

That's my story this morning. Happy Holidays!

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