Thursday, December 22, 2011

Resistance tests highlight stock market's Santa rally effort: technical & VIX charts

Many eyes are now on the stock market testing resistance right now - ironically, because the classic Santa rally occurs during the last 5 trading days of the year, i.e. next week, plus the first 2 trading days of January. (My source on this being the good folks @AlmanacTrader.) This week has turned out to be a classic buy-on-Monday, and goes along with the great cycles work we've featured on this blog, including Andre Gratian's identification of a Dec. 19 low as well as Raymond Merriman and ChartsEdge. But as everyone sees, the S&P 500 is once again looking at resistance just above in the form of its 200-day moving average (see first chart here). And there's more.

Below is my more technically annotated daily chart of the SPX (all these charts courtesy of, the charting service I (Ariel) use). The 1257 level in SPX has been an important pivot for many months this year, and now it's also another instance of the index testing up against the downtrending channel line I've marked on this chart. That line can be broken - but as I tweeted earlier today, I'll have to let the market show whether or not it'll break above it to the upside. I won't assume it, for trading purposes. That chart is below; after that, I've got other discussion on my charts of the McClellan Oscillator, and the volatility index (VIX).

The McClellan Oscillator, one of my favorite charts which I annotate quite a bit with trendlines, proved very useful Monday night when we identified that it confirmed positive divergence, pointing toward the good trading bounce in stock markets. But now, it's just tested up to another trendline, as you can see, Here too, it can break above it. Typically, it would either bobble a bit first, or if it makes a clean break then it's likely to test back to this trendline.

Another interesting point is that when you look at the pattern the McClellan Oscillator has exhibited over the past year, it has generally tended to signal a high point (crest) at the end of each month this year, with the exception of the opposite - trough lows - at the end of July, September, and November. Now we're seeing a possible crest at the end of December. Hmmmm!

Now here are my charts for the daily and weekly VIX. On the daily, I've drawn my standard trendlines in blue, and today added a potential downtrending line (in pink). I did this because the VIX is quite extended today, and formed a "hammer" candlestick which signifies a potential reversal snap if only for a couple of days. If the VIX tomorrow moves over today's high, that will be a signal to buy VIX and/or sell stock indices, and then close that swing position two trading days later. (Well, the U.S. exchanges are closed Monday, so either Tuesday or Wednesday.)

For a longer term picture of the VIX, the bottom chart is my weekly on which I updated trendlines (as I promised in a tweet today). The VIX level is fascinatingly close to kissing back toward the large downtrend channel line which it broke above months ago. I don't know if it will or must actually touch that level; if so, that could take it to about 16. But there's a support line at about 16, and further, there's a c=a symmetry level at 19.91. We'll see if the VIX will touch those levels, or whether the market movements over the next week aren't that bullish.

All in all, these various charts show that the stock market is right at resistance. That isn't unexpected for this time of year. Even with the VIX, which may be so low not just as a measure of complacency but also related to the end of the year. A more cynical thought would be that large investors and funds may be releasing hedges because they're not planning to maintain large stock positions after this month. Letting the charts speak for themselves - we'll just have to see if the Santa rally breaks resistance. If it does, then the significant levels to watch for next resistance will be 1262-1267, 1284, 1292, and 1326. Happy market navigating tomorrow, as we also get ready for a long three-day weekend for the Christmas holiday!

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