Friday, December 31, 2010

New Year 2011- Year of the Rabbit

Last Week the S&P 500 Index extended its gains this week closing at SPX 1256.77. This is a new rally closing high and new 2010 closing high. Volume continues to be low and this will be the case next week as well. The SPX is now only 1.5% below technical resistance at 1275.25. Just above is the very important resistance level at SPX 1305.32. This is the closing high from all the way back on August 11, 2008.

This week:

The S&P 500 Index - SPX finished the year with another weekly gain, though a fractional one, and new weekly closing high.

Next week will be the first week in January and watched by many as a forecaster of the coming year.
 I am not of that mind but I still watch with interest how the new year starts.

For many years the start of the new year was marked by strength in small caps. A first week rally often accurately predicted a good year ahead. However as a forecaster for the rest of the year, the first week of January has not been very accurate in recent years.

One concern as we start the new year is the current Elliott Wave count. Since the correction lows were reached back in late June, 2010, the SPX has risen in a very obvious five wave pattern. Typically when such a pattern exists, the fifth wave, which we are in now, ends with a substantial correction.

Wave analysis has its limitations as does any technical analysis that tries to forecast what will happen in the future. For example, we could have a very limited correction and then start an entirely new advance. Or we could keep advancing and in doing so create a different wave pattern.

I do not try to "guess" ahead of time what the market will do, though I do try to look ahead via wave analysis, Fibonacci support and resistance levels, and other technical analysis tools. I have never found a crystal ball that actually worked. But I am watching carefully for signs that the current wave 5 might end with a "tradable" correction.

The SPX remains above its 50-day moving average having successfully tested it twice at the correction lows. The SPX is well above its 200-day moving average. The 50-day moving average is above the 200-day average which is bullish.

The SPX still has room to move higher. The next resistance level is up at 1275.25, and it is a technical one. The next major resistance level is up at SPX 1305.32. This is the market high from back on August 11, 2008. Profit taking is sure to take a toll on stock prices assuming we reach this level in coming weeks.

A close above the 2008 highs would be hugely bullish and point to a resumption of the entire 2009 rally and considerably higher highs. The potential for an entirely new bullish five wave pattern would be quite real.

The SPX 1217.28 level should act as strong support. When it was reached back in November it resulted in a reversal and month long correction.

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