The market was down 1.6% last week and Wednesday's decline (on 12/11) was the largest in four months. Is this the beginning of the market's long overdue 20% pullback?
Given that it's mid-December and most investors are looking for another Santa Claus rally, the media and their professional sources aren't giving the idea of a sizable pullback potential much attention. All eyes are now focused on the the Fed and the expected Santa Claus Rally. December, on average, historically returns 1.5%, which is twice as good as the typical month.
A Contrarian Perspective
If the market (VTI - News) really fools the majority of people most of the time, it seems that a Santa Claus rally would not occur this year as the general consensus seems to be that Santa Claus is a given.
Fed taper is still far from a certainty just as it has been during numerous pullbacks over the past year, so again it seems the majority of investors are not expecting much December surprise, chalking this latest pullback up as just another buying opportunity in this record breaking rally.
And so far, that is all this pullback is - another dip buying opportunity. That is, until it isn't any longer.
But how will we know when it isn't "any longer"? We use technicals to warn us.
The Market Setup
Over the past two months we have used technical analysis to trade the short term movements of the market, and it's worked well, capturing over 4% of gains in the S&P (SSO - News) for our Technical Forecast readers. We are also now watching a similar technical setup as those previous trades that were able to capture the market's moves to new all time highs.
In the above chart, a bearish technical pattern shown in red has also formed. If the market closes below 1775, it will trigger that trade and suggest the market (SPXS - News) has further to fall before this decline is over. At this point I put the odds in favor of this outcome, but so far the market has not closed below 1775.
We prefer not to go against the trend, so until the market closes below 1775, it will not confirm the bearish outcome.
The Bull Setup
Given the market's historical rise over the last year, all pullbacks have provided buyers at key price levels. 1775 is now that key level as former resistance is now support that has also held this pullback thus far, so buyers are again stepping in at that level. Therefore if they can push the market back toward new highs, it should be bought (VOO - News), just as we did in September, October, and November and suggested again in the chart.
Relying on traditional investment tools such as fundamentals, news, or valuations has not been the way to play this market, as all news it seems has been used to justify the market's continued rise.
Instead, letting price be your guide is a better way to follow a market that has been in one of the longest and largest bull runs ever. 1775 is the first key level that will warn us the long trade is no longer the front runner.
The ETF Profit Strategy Newsletter utilizes Technical, Sentiment and Fundamental indicators to stay on the correct side of the market. The trend is your friend and that trend has been up, but if 1775 fails it will be the first warning shot that this market's path of least resistance may no longer be higher.
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