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Fleeting Hope For Thanksgiving Rally

11/23/11 09:58:18 AM
by Billy Williams

Key technical factors reveal that the markets are at a critical turning point -- which way will it go?

Security:   SPX
Position:   Hold

Which way will the markets go?

In light of the malaise infecting price action in recent weeks, unless the Thanksgiving rally -- a pattern that typically sees price go up to the market close of the day before Thanksgiving and extends to the limited day after the US holiday -- appears, traders might have to reconsider trading the pattern this year. Thus far, nothing has appeared to work out as stock leaders such as Haynes International, Barrick Gold, Intuitive Surgical, and the much-anticipated IPO, Groupon, have foundered from technical positions that would otherwise be actionable to the long side of the market.

First, at every market turning point, overzealous traders typically emerge to get up on their soapboxes and make the case that due to "special circumstances" given the present market conditions, the market will fall into calamity or rocket higher in the face of overwhelming euphoria. In addition, contrarians get up on their own soapboxes to declare that "this time, things will be different" and state that what has almost always worked will not work now for no other reason than the herds that follow blindly are wrong and, as a consequence, are immediately declared party-poopers and ignored by the investment community.

FIGURE 1: SPX. As the SPX treads water, its lower Bollinger Band moves up through and within its Keltner channels, showing a contracted condition in its price action right at the 0.50 Fibonacci retracement level.
Graphic provided by:
At first glance, the obvious explanation is that the overall market is struggling to maintain the status quo in a part of the year where the bulls have usually emerged even as the market had been exhibiting weakness or lackluster price behavior, but this time, things are different. Europe is a mess and the US sits nervously on the precipice of a huge calamity if the debt crisis across the Atlantic explodes and washes up on its shores.

Adding to the anxiety of this scenario, the "Super-Committee" formed by Congress is proving anything but. Even as the debt crisis looms with Spain, Greece, and Italy in the news where their markets are in death throes as they struggle with their problems, US politicians are unable to come together and appear as oblivious as the first-class passengers on the Titanic.

As a result, the SPX and other indexes continue to sell off on light volume, but if volume picks up to the downside, be prepared to follow suit. Already, the SPX is showing contracted price action at the 0.50 Fibonacci retracement level and the lower Bollinger Band has moved up within its Keltner channels (Figure 1). The combination of these technical factors in the current market context shows a turning point on the horizon with odds on the side of the bears.

Keep a list of shorts available as weakness expands into the market, but if the Super-Committee reaches a deal on the nation's spending and debt problems, then it could be enough of a impetus to reverse the market's current course and instill confidence into the market and send it higher, so be ready to go long.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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