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Can the two-month rally make it three?

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Stocks sold off on Friday, a day many of us expected to get another post Thanksgiving seasonal boost from the market. The Dow lost 113-points, and the three major indices all shed about 0.4%. This negative day came on the heals of two bills signed into law in support of Hong Kong protesters despite China's objections last week.

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The price of oil fell 5% on Friday and that may have also contributed to the weakness in stocks, particularly the small caps where there are a lot of small oil refinery companies.

Friday's loss took a little steam out of the bulls' case but clearly we've had a great year for stocks and most recently a two-month rally off the early October lows that has probably pushed investor's sentiment to the more dangerous side of this Cycle of Emotion chart. Where do you think we are?....

I'm sure you remember the 2017 rally, and particularly how it went into another gear to end the year and push into the start of 2018. That was a classic "Euphoria" moment for investors, and of course after Euphoria, reality tends to set in moving them to that Anxious level, and the cycle continues.

We may not be at that point yet, especially with the nice sideways 5-month consolidation that we had before the October rally, but you can see that the S&P chart is quite extended from the 200-day EMA now as we head into the the best month of the year historically for stocks. There's a chance that we'll get a euphoric ending to this rally over the next couple of months. But, not to worry, those endings could just be future opportunities for us, if you play it right.

The start of December shows a lot of green on the seasonality chart, which means we get some healthy gains when stocks are up, but the percentage of times positive in that first week isn't too much better than 50/50. Then there's a lull in the middle of the month, and the Santa Claus rally doesn't really start until about the 20th.

Chart provided courtesy of

Of course nothing works all the time but a sound approach this month may be for market timers would be to be patient while the market digests the recent two-month gains, then make your move to catch the late month rally. These are just averages and it never really is just that easy, instead the market will do what it can to try to frustrate us.

The S&P 500 (C-fund) dipped on Friday, erasing much of Wednesday's gains. The top of the channel was hit and the index stalled, but it is still trading within that rising channel, which has been intact since early October. At some point we'll see that channel break because support levels are getting thin the higher it goes without some kind of meaningful pause and consolidation. The 50-day EMA or the top of the September peak would be typical pullback targets, and with seasonality getting stronger as the month goes on, the chances of a pullback earlier in the month seem more likely.

The weekly chart shows the breakout, which is a very positive move coming off that multi-year consolidation, but at some point it will likely come back to attempt a test of that breakout line again, which is rising.

The DWCPF (S-fund) pulled back rather sharply, which was kind of a surprise for the Friday after Thanksgiving. There's no rule that says it can't continue in that rising channel, but realistically the chart probably needs to pause before it starts its next leg higher.

The Dow Transports were also down sharply on the day, and this chart was down on both the Wednesday and Friday surrounding Thanksgiving, typically strong days for stocks. The danger here is that this market leader may be trying to form a lower high after breaking its ascending support line earlier in November.

The EFA (I-fund) pulled back as well as it fell short again of breaking out above that sideways consolidation, and I believe I called it possible flat top last week.

The price of oil fell 5% and here it is again threatening to breakdown from that rising channel that has a bear flag look to it.

The AGG (F-fund) was down for a second day on Friday and it would not be unusual to see this move down to test the top of that bull flag again before resuming higher - assuming it holds as support if it does.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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