The Dow Jones Industrial Average exploded 300 points higher [Monday]. It was one of the biggest one-day gains of the year… And it recovered almost 70% of last week’s losses.
Yawn… No one seems to care…
One analyst after another showed up on the financial TV networks and proclaimed, “It’s just an oversold bounce. Stocks were due for a quick pop higher. And that’s all it is.”
Oh, but it is so much more than that…
[ad#Google Adsense 336×280-IA][Monday] was the start of the “Santa Claus rally” – a year-end stock market bonanza that could pop the S&P 500 8% higher or more.
Let me explain…
First off, the mere fact that everyone else seems to think [Monday’s] action was nothing more than an oversold bounce has the contrarian in me thinking otherwise.
Consider this chart of the S&P 500 plotted along with its Bollinger Bands…
Bollinger Bands help outline the most probable trading range for a stock or an index. Moves outside of the bands are rare and indicate extreme overbought or oversold conditions. It is these extreme conditions that set the stage for violent reverses in direction.
The blue arrows on the chart indicate the few times this year that the S&P 500 has traded below its lower Bollinger Band… and then rallied back up within the bands. Notice the action immediately following the arrows…
In every case, the S&P 500 rallied back toward its upper Bollinger Band. It wasn’t always a straight shot higher, like the explosive 16% move in October. (The move in August, for example, was a choppy 8% rally.) But buying the S&P 500 on any of these “buy” signals would have generated large profits over the following four weeks.
We got another buy signal yesterday.
Everyone else seems to think it’s just an oversold bounce. I think it’s the beginning of a move back up toward the upper Bollinger Band. In other words, stocks could gain 8% or more between now and Christmas.
Here comes Santa Claus…
Best regards and good trading,
–Jeff Clark
[ad#jack p.s.]
Source: The Growth Stock Wire