The Expected Santa Claus Rally - a Landmine!

By: Ajit Singh | Fri, Oct 29, 2010
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"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." ~ Warren Buffett

Two months from now we'll soon be sitting into the year of 2011. So with the markets stubbornly sitting at current lofty levels will the Santa Claus Rally take stock markets higher?

It is our reckoning that the expected Santa Claus Rally may actually be the start of the next serious leg down that will batter stock markets in 2011.

Being at end of October and we felt it was an important time to take a look at the monthly charts to put current prices into the overall context of things.

We start with the Dow Jones Monthly Chart:
Dow Jones Monthly Chart

Most Long Term projections can seem absurd initially until of course they start to become reality. This is because with the Dow Jones being at 11,000 odd the psyches of traders find it hard to even see 10000 before year end. Complacency is what catches the herd mentality of guard. When I projected THE top of the Dow Jones at 'no more than a few hundred points above 14,000'... the notion was hard to digest. Of course having an open mind daily is part and parcel of trading. Being able to reset your mindset continuously is an integral part of trading.

The ABCD pattern above shows the rough likelihood of tumbling stock market prices for the year ahead.

What is the Problem?

The problem is that this year has been a whipsaw year also known as sideways action or range bound activity. This range bound activity is probably the worst sort of environment for a trader and this is because it easily traps your mind! When we're at 11,000 for the Dow Jones we are at the top of the range for this year and with it the buoyancy leads the mind into believing about a rally. Yes a rally from 10,000 to 11,000 can be seen as a 1000 point rally - correct. However can you view this as a rally for the year on the whole? Not in our experience. So what does this mean? Simply imagine 10,000. The problem is you can't and that is because the market is trapping the minds of traders as it lets the market sit near the top of the range. This is why in our previous articles we've spoken about breakout fake outs. These are likely in current scenarios as the mind already believes this rally the only thing missing is the poisonous cherry on top - breakout fake out! So what happens when the Dow falls around 400-500 points in two clean sessions? All of a sudden that 10,000 mark comes alive. WHEN this 10,000 mark is hit that is when we're suddenly sitting at the bottom of the years trading range AND with it the buoyancy turns completely sour in a flash!

When the market is sitting at the years lows you can easily imagine lower prices after that but imagining anything of the sort at this moment in time is exactly the Santa Claus rally disguised as a landmine!

A Landmine that could be disastrous for stocks next year and all in which the instigation of this decline could well be sparked in the closing months of this year!

Once again we're not marrying this stance BUT we are warning traders not to become complacent. At least the warning may trigger you to think with an open mind. How different will the mood be if the Dow Jones moves from 11,000 to just 10600!

The Sterling Monthly Chart
Sterling Monthly Chart

The dollar decline is getting just like the Euro decline earlier in the year. At TMS we warned time and time again to expect a rally to emerge out of all the Euro pessimism at the time but at the time every one talked about the dollar strength. Now that every ones happy enough to talk about the Dollar Doldrums, at TMS we'll bring ourselves into a sublime state of happiness in regards to the possible re-emergence of dollar strength!

Of course this would mean a decline in stocks and a decline in currencies across the board against the dollar. So above we have the Sterling chart in which each candlestick represents a month's worth of action.

The ABCD technical pattern above simply shows why we're failing to get over excited about the Sterling's strength. For us at TMS the recent pound strength has been pretty dire and hasn't panned out similarly to previous real rallies that we have seen. Although we have seen the Sterling at 160, we would warn of the key round number being a key trap in which a decline unfolds. It's been over a month and below you can see why we view the recent strength as simply a 400 point range bound activity:

4 Week 400 Range

The Red Rectangle above represents the four week of range bound activity that many are viewing as a rally and in which are getting excited by the 160 mark action.

If you put it into perspective a few days of declines will bring the Sterling into no man's land in context to the chart above!

Euro Monthly - Head & Shoulders!
Euro Monthly Chart

The Euro made a high of 14159 and since has fallen back a little although still flirting in reach of 140. Importantly the monthly chart above shows a Head & Shoulders pattern which can easily produce a decline in the last leg in which the Euro can start to think about its lows again.

The right shoulder above shows the current price action which can fail from the red shoulder line shown above.

TMS would simply like to warn about sudden dollar rallies which could start to surface in the coming months.


For the first time ever TMS has made a 6 month subscription package available to our global audience in which an exclusive rate has been issued for a limited time only. All our annual subscription packages were snapped up immediately and unfortunately will not be offered again until some point in 2011. Having been bombarded with requests to bring back a package rate we have decided to tailor a 6 month package for new clients whilst also giving a chance for our current monthly subscribers to join us at a rate in which the availability will soon finish - TMS will only allow for the availability of 100 places (Hurry only 47 remaining).



Ajit Singh

Author: Ajit Singh

Ajit Singh


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