Beware of the “Sucker Clause” Rally
Monday, December 8, 2008 16:41Seasonably speaking, December is one of the best months to own stocks. For the past 20 or so years the average monthly return in the month of December has exceeded 3%. Considering how quick and intense this collapse has been, one must anticipate a counter-trend upward correction. Bear markets are notorious for these but you should try to avoid getting caught in the euphoria and pay attention to the longer term trend.
The chart below gives us a better look at the big picture. The primary downtrend line (red line) remains in tact without even a glimmer of hope in being tested. We can also see that two areas of possible resistance (Secondary downtrend line and the 13 week EMA) meet one another at 9,280 on the Dow Jones. This seems like a reasonable spot for the rally to exhaust itself.
Fibonacci Resistance (Alternative Scenario)
Leonardo of Pisa, or Fibonacci, famously discovered a pattern or sequence which is found throughout nature. This ratio of numbers later became known as the golden ratio, the golden mean, and the divine proportion. Fibonacci was believed to have unlocked the mathematical key to all living things.The sequence can be found in found in human symmetry, tree formations, leaves, galactic swirls, etc. Some technicians believe that this pattern is also prevalent in human thought and since the stock market is one of the best representations of social mood and human emotion, we can use the numbers to estimate price outcomes. Fibonacci numbers in stocks tend to work suprisingly well.
If you’re not familiar with Fibonacci’s work click here to learn more.
The chart below illustrates another possible upside scenario using Fibonacci retracements. We measure the market from the top to the bottom and devise the various Fibonacci retracement numbers (38.2%, 61.8%,). The first Fibonacci resistance point (38.2%) would take the Dow Jones to 10,048. The primary market downtrend, however, would still be in tact until it was able to break above the 68.2% retracement level of about 11,600 (which does not seem likely anytime soon).
In the words of the great John Murphy, “Keep you’re eyes on the charts and off the TV.”
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