The broad market has been very kind to us this fall in allowing us to catch an impressive rally near the August low and up to the current high for the year (as measured by the S&P 500 index). This rally was against the consensus thinking heading into the presidential election, a time of general fear and worry over terrorism, the price of oil, election-related concerns, etc. And of course, it wouldn't be autumn without those annual forecasts of an "October Crash" that many analysts presented. But in true contrarian fashion, the market did the opposite of what the super bears expected and went the other way.
This brings us to where we are now. The consensus on Wall Street expects the market to give us another rally based on "seasonal tendencies." The analysts on CNBC act as if this so-called "Santa Clause rally" is a given since almost every year produces an impressive flourish in the stock market as we close out the year.
Normally I'd be in agreement with them, and admittedly I was up until very recently. But a turn of events has let me to believe that Santa Clause has probably already passed through town and won't be coming again this Christmas season. In other words, the market has likely seen its top for the year.
As you know, in the immediate-term I favor using the 5/10/15-day moving averages, which are a derivative of the 30/60/90-day MAs but on a smaller scale. The Dow this week closed below its 15-day moving average, which signals an immediate-term topping process well underway. In fact, despite today's rally the Dow was unable to close back above its 5/10/15-day moving averages. To me this is a sign of immediate-term weakness.
The three pillars of my technical approach to the immediate-term are the 5/10/15-day MAs, the daily stochastics indicator, and the daily MACD indicator. In each of the three major indices, the stochastics and the MACD indicators have recently turned down with the MACD in the Dow 30 index confirming an immediate-term sell signal today.
I believe conservative traders should limit their exposure to the market in the immediate-term before we see how low the market will correct. While my overall outlook for early 2005 remains bullish, I believe we could be hitting a "speed bump" as we end 2004 and head into 2005.