December must have ushered in the cavalry, because the market busted out big time today after closing November looking like it was quite ready to sell off. I have been looking for a big move during this consolidation period, and today seems to indicate that it will be a breakout rather than a failure. But one day does not make a trend. We now await bullish confirmation, which has been elusive ever since the big post-election apparent breakout. In fact, the market has preferred to test support from its 40- and 50-day moving averages rather than seriously threaten any resistance levels.
On the Tuesday before Thanksgiving, the market lost support at Nasdaq 2500 after losing S&P500 1200 the week before, and it was testing support at the psychologically important Dow 11,000. It then regained Nasdaq 2500 but then continued to consolidate just under the S&P500 1200 level before threatening to breakdown significantly this week. But today changed that negative picture entirely.
I have been talking for several weeks about how the SPY chart is shaping up for the past 4 months almost identically to the first 4 months of the year. As shown on the attached chart, the break of the 40-day moving average on Tuesday seemed to correspond to the similar break on May 4, and suggested that a similar selloff might be in the offing. But rather than another "flash crash" like we had on May 6, the market consolidated and the broke upwards today. However, I am wondering if this move lines up with the recovery that occurred immediately following the May flash crash, as shown in the circled areas. It is occurring at a higher point than it did in May, but of course that was because it had fallen so far. We still might be in a similarly developing pattern that will play out in the next few days.
I have been expecting a retest of prior resistance-turned-support at SPY 115 and then 110. It might be delayed by the holiday season…or it might not happen at all. To be sure, there are plenty of market observers calling for the start to a very strong and sustained rally.
I'm still prepared to see further downside in the near term.
After spiking during Tuesday's weakness to almost 24, the market volatility index (VIX) fell hard today to as low as 20.40 before drifting higher all day to close near its high at 21.36.