Light Volume Rally Brings in the New Year

(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

Good day and welcome to the New Year! I hope that your holidays went well! I've been a bit under the weather myself... flu turned into walking pneumonia... ugh! So, of you've emailed me over the holidays, please give me a few extra days to get back to you since I'm heading back to the doctor in the morning and am going to be resting up for the most part this week. As a result, I will only be in my home office a few hours each day.

Even though it seems like more than half the people I know have been sick recently, the market has actually done pretty well since Christmas. When we were heading into holiday trading the indices had just failed an attempt at another slightly higher high on the daily time frame on December 17th. This weakened the odds for a strong momentum reversal like we had been looking for, although it didn't completely rule it out. Had the indices broken the highs from earlier in the month by just a bit, then the three waves of daily buying would have formed a corrective pattern that could have possibly even led to a third low on the weekly time frame. By forming equal highs, however, it opened the door for a sideways range and upside breakout.

Nasdaq Composite ($COMPX)


At first the outcome seemed a bit uncertain. The indices broke the uptrend channel by pulling back into the zone of the lows from the 12th, confirming the sideways range. At that point the indices would have had to have based for about a week and a half to build up enough of a base to break lower. Instead, the base at this previous low only lasted about as long as it took the market to pull back off the previous high. Instead of holding the range the market broke higher out of the smaller range on the 30th. This confirmed the two-wave sideways base on the daily time frame to trigger a larger buy setup on the 60 minute to daily charts.

Dow Jones Industrial Average ($DJI)


Typically a breakout such as this is accompanied by larger volume. The holidays and the fact that flu season has been particularly evil this past month could account for part of that lighter volume, but it does still create doubt that the buying will hold. Sometimes a security will form three waves of buying, put in a longer correction that between each of those waves up, then put in a fourth wave before leading to a strong reversal to break the uptrend. Unless we see some continuation of the strength into early this week, then this pattern could easily play out.

Right now the market has three waves of buying on the 15 minute time frame as well. This trend is stronger than the daily one, but it hit equal move and price resistance into Friday's close. This leaves it favoring a break of this uptrend channel on Monday. For the daily move to hold I would want to see it correct no more than about a third of the rally from late last week.

S&P 500 ($SPX)


Last week the market finally ended a month-long losing streak. On Friday, the Dow Jones Industrial Average ($DJI) gained 258.3 points, or 2.9%,and closed at 9,034.69. It was up 6.1% for the week as a whole and all of the Dow's 30 index components closed in positive territory. The S&P 500 ($SPX) rose 28.55 points, or 3.2%, on Friday and closed at 931.80. Crude oil prices jumped and finally seem to be showing a reaction to weekly and monthly support. They closed at $46.34 a barrel for February delivery. The Nasdaq Composite ($COMPX) gained 55.18 points, or 3.5%, to close at 1,632.21.





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