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How Far Will this Market Bounce?

Nov 26, 2012
Chad Karnes, CMT

The market has rallied from its recent lows. Will this turn into more than just a counter-trend bounce, or is the Thanksgiving pop all we will receive from the Santa Claus rally?

The market rebounded 2% on 11/19 and another 1% on 11/23 and it looks like the Fiscal Cliff worries are behind us!  At least that is how the media justified the rally this past Thanksgiving week.  Some of those enthusiastic headlines are below:

“Markets are Staging a Wild Rally All Around the World (NYSEARCA:EEM)” – Business Insider

"Rally Caps On: Stocks Surge; Fiscal Cliff Looks Less Disastrous" - Wall Street Journal

“Markets (NYSEARCA:DIA) Rally with Renewed Optimism” – ABC News (NYSE:DIS)

“We can get our fiscal situation dealt with” – U.S. President, Barack Obama

This sounds all good and dandy, but do the media really expect us to believe that the market rallied (NYSEARCA:IWM) because all of the sudden the fiscal cliff worries are no longer there?  Poof!  Magic!  Worries Gone!

Fool Me Once, Shame On You

Remember all the past market rallies this year when Greece (NYSEARCA:GRK) was supposedly no longer a problem?  Here is a recent article on how things are really doing in Greece - its stock market is down 12% from its October highs.

Remember all those rally days because Spain’s (NYSEARCA:EWP) financial woes were no longer "on investors minds?"  Spain is doing so well they are now offering citizenship as incentive to buy a house (article).  Meanwhile a major geographic and economic part of Spain now says it wants to leave (article).

The media it seems can find any reason in the world for a rally, decline, or even a flat day - anything to get your attention and to generate noise.

A Better Approach

The media has no clue why the market rallies or falls. The good news is we don’t really need to know the reasons in order to take advantage of it.

On 11/16 when the S&P was at 1360 in the ETF Profit Strategy Newsletter we alerted that “Seasonally, November and December are very strong months.  Couple that with such a quick sell off (down 8% in under 1 month) and there exists the potential for a snapback rally (NYSEARCA:SPY) as oversold indicators find relief.  A break out of the downtrend channel @ 1370 (SNP:^GSPC) currently is a sign that the selloff is at least taking a short-term breather.”

Below is one of the charts that accompanied our Technical Forecast that weekend along with our targets for the rally, “A break out (of the downtrend channel) likely means the decline is over for now and prices will work their way back to the Fibonacci retracement levels.  A rising 60 minute RSI lends strength to this option.  This is the scenario I think will happen given the seasonally strong days surrounding Thanksgiving and the overall historical biases.”  Price indeed broke out of the channel and reached 1410 on 11/23, a 50 point rally in a week.

Click here for more charts and commentary.

Right now prices have rallied, relieving an oversold market and sentiment condition.  The market sits firmly in its Fibonacci retracements target.  From here we are watching key support and resistance levels to help us identify whether prices will resume their uptrend or if the Thanksgiving Rally was just a brief counter-trend correction and all that Santa will provide this year.

The ETF Profit Strategy Newsletter identifies important support/resistance levels and combines them with common sense technical analysis to provide a short, mid, and long-term forecast along with actionable buy/sell and target recommendations.

Follow us on Twitter @ ETFguide

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