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Jump Aboard Santa’s Sleigh Now

There could be a round of profit-taking, but it appears the Santa Rally has begun


On Wednesday, the Dow rallied to a new record close, and the S&P 500 exploded to an all-time closing high following the Federal Reserve’s slight paring of its stimulus plan.

The Fed decided to “taper” by just $10 billion from its prior $85 billion bond-buying program. And it kept interest rates unchanged. Additionally, Chairman Ben Bernanke said that easy money and low interest rates will stay in place. Stocks, gold and even bonds rallied on the news.

At the close, the Dow Jones Industrial Average gained 293 points at 16,168, the S&P 500 jumped 30 points to 1,811, and the Nasdaq vaulted 46 points to 4,070. The NYSE traded a total of 4.3 billion shares and the Nasdaq crossed 2.2 billion. On the Big Board, advancers outnumbered decliners by 3.5-to-1, and on the Nasdaq, advancers were ahead by 2.4-to-1.

Dow Chart
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SPX Chart
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Chart Key

Bullish chart patterns were confirmed Wednesday as the Dow blasted to a new high, and the S&P 500 jumped to a new closing high while our internal indicators (MACD, slow stochastic, momentum) turned up from oversold.

The very positive response to the Fed’s decisions puts us strongly on the side of equities as more new highs are expected from blue-chip, mid-cap and small-cap stocks. Tomorrow, I will provide trading targets for the new breakout.

Recent chatter on our discussion board encourages me to address a basic understanding of technical analysis and define some of the common terms that I use in my reports.

Readers often ask me about the length of trends in terms of time. For example, what are short- or near-term, intermediate-, and long-term trends. For the answer to that question, I like to go back to Charles Dow, the inventor of the Dow Theory. All modern technical analysis had its beginnings with Dow’s theory, and understanding it will also help you decide whether you are a long-term investor, an intermediate-term trader, or a short-term or perhaps even day trader.

The Daily Market Outlook attempts to clarify the technical trends of the market for investors and traders alike — not always an easy task. Thus, it may be helpful to consider Dow’s concept of three trends (major, intermediate and minor) in order for you to decide what type of investor you are.

Major (primary) trends are like the ocean tides. A primary bull market is like an incoming or flood tide, which runs farther and farther up the beach until it finally reaches a high-water mark before it begins to recede.

While the tide is coming in, there are waves breaking on the beach — some incoming and some outgoing. While the tide is rising, each succeeding wave pushes a little farther up onto the shore, and when the tide has reached its maximum height, the waves recede, never quite reaching as far as their predecessors. The waves are the intermediate (secondary) trends.

Meanwhile, the surface of the water is in constant agitation as wavelets and ripples move along with and against the tide. The wavelets and ripples are analogous to the market’s minor trends and are unimportant day-to-day fluctuations to long-term investors but followed closely by traders.

Conclusion: Currently, the tide is rising, i.e., we are in a bull market. And the waves (intermediate trend) are still incoming. But some of the wavelets are down while others appear to be turning up.

The 20-day moving averages on the Dow industrials, S&P 500, Nasdaq and Russell 2000 were penetrated by Wednesday’s strong price action. There could be a round of profit-taking following the big buying spree, but it appears that Santa’s rally has begun and we should jump aboard his sleigh.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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