For Sunday, December 6, 2009                                             Go to Website
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Last week we wrote:

"Last week we wrote that the holiday week encompassing Thanksgiving in the U.S. was historically a bullish one. And right through Wednesday that was the case. But Friday's announcement that the sovereign wealth fund of Dubai requested a postponement of billions of dollars of debt this week knocked the markets around the world for a loss."

This week:

The prior week's selling based on the Dubai default seemed to forecast more losses for this week. Instead, the markets rallied Monday and as the week progressed held those gains and added to them.

The S&P 500 Index - SPX reached new intra-day rally highs several times this week but did not manage to close at new daily highs.

The weekly chart (below) is more bullish, showing higher intra-week lows, higher intra-week highs and a higher weekly close. This is a new 2009 high based on the weekly stats. These are the actions of a bullish stock market.

There are still those who look for a new bear market decline culminating in an economic collapse and lower lows than the March bear market lows. Basically a second wave down for the markets. These forecasts are becoming ever shriller but as much as we try to understand their logic, the charts are not supporting such a sell off.

Of course as trend traders it makes little difference to us. Any such decline would just trigger sell signals and we would turn bearish and profit on the way down. But as the markets continue to make new highs and climb the proverbial "wall of worry," we just do not see a catastrophe ahead.

Looking at the charts, the SPX has been stalling at "about" the 1100 level for almost three weeks now. You can see this in the daily chart below.

Late this week the markets tried to push above 1100 and on each try, pulled back. The SPX 1119.31 level was reached this week intra-day on Friday but did not hold.

This is becoming a very important resistance level. We discussed this several times in prior reports. The 50% retracement of the entire 2008-2009 stock market decline is a much publicized number. Many investors are using it as a reason to take profits.

So a decisive close above would be very bullish, pulling sideline money back into stocks and likely launching a new leg higher.

A decisive close above SPX 1119.31 would be very bullish for coming weeks. We look at closes above significant resistance as bullish indicators so the 50% retracement for the SPX is very important.

Also, three weeks ago we had another breadth explosion trading day and discussed it in this report. On November 9, up volume on the NYSE swamped down volume by 16 to 1. Long term subscribers know that such days with greater than 9 to 1 up volume vs. down volume are rare events and typically they occur at the "beginning" of rallies. We had several of them back in March and early April when the current 2009 advance was just starting.

There is one requirement left. We need two of them within a fairly short time frame to have a new bullish signal (based on this indicator).

So we are not just looking for the close above the 50% resistance level, but potentially another breadth explosion day. If we get either of these the likelihood of a rally through the end of the year will grow exponentially.

The flip side of the coin is that we are without a doubt overbought and the markets could correct at any time. The 50% resistance level is as good a place as any to start a correction. Markets can stay overbought for a long time so it is not a reason to sell, but the potential for a decline does need to be noted.

The SPX remains well above its 50-day moving average, which is considered by many as a bullish indicator. The 50-day average is acting as support for this advance and has only been broken twice since March.

Conclusion:

The early March close below the November lows, as well as below the 2000-2002 bear market lows, has completed a bearish Elliott Wave (5 Wave) pattern.

We have an Elliott Wave confirmation of a new bull market for the SPX. This occurred when the SPX closed above its prior bear market Wave 4 rally high at 934.70 on Monday, June 1st. Accordingly, we are at the beginning of a new advance that will last months and possibly years. How far it will go is unknown, but it should be very profitable and consist of several waves higher, with corresponding corrective waves along the way.

The SPX is above its 50-day moving average and also above its 200-day moving average. Both averages are moving higher.

Looking back to the beginning of this advance, there have been a total of nine breadth surges of better than 9 to 1 up volume vs. down volume which have occurred during the early weeks or at the start of each new rally. These predictive days have already been proven correct. They have no upside limit though so higher highs can still be ahead.

Three weeks ago we had another breadth surge. This time it was a 16 to 1 up vs. down volume rally on the NYSE. We are watching for a second such day to confirm a bullish signal based on this indicator.

The target for this rally is still SPX 1119.31, only 1.1% higher based on Friday's close. A decisive close above SPX 1119.31 would point to a run to the next resistance level, at SPX 1226.

The SPX portion of this strategy is in a BULLISH position and in the Rydex Nova S&P 500 Fund - RYNVX (or other bullish S&P index fund).

S&P 500 Index (SPX) Daily Chart

S&P 500 Index (SPX), Weekly Chart

Nasdaq 100 Index (NDX) Chart Analysis

Last week we wrote:

"The Nasdaq 100 Index - NDX did not reach new highs early this week as did the SPX, but it certainly suffered in Friday's market sell off. Still by Friday's close there was very little change in the index for the week, though we do have a downward bias in place over the weekend and will have to deal with it Monday morning."

This week:

The Nasdaq 100 Index - NDX has again closed above critical resistance at 1772.03. This occurred even after a big sell off at the end of last week which appeared to be pointing to a down week ahead.

This week the NDX rallied from the start and though it hit some bumpy trading at week's end, it closed with a solid gain and above resistance.

The NDX has also again closed above its 50-day moving average line. That line was tested in last Friday's sell off and it held. This adds to the bullish picture for the NDX with solid support below and a close above 1772.03 confirming the rally.

The NDX is encountering a great deal of volatility now. This is probably due to the strong resistance at current levels. There is a great deal of profit-taking in progress and it is being met by eager buyers. One side will win in coming days.

If we get a rally that closes decisively above the NDX 1800 level in coming days, we would expect to see a lot of sideline money reenter the markets, thus adding to the gains.

Conclusion:

The NDX has a Wave 5 Elliott Wave low in place at its November 2008 lows. The NDX has closed above NDX 1378.40, the Wave 4 high, which confirms this as a bear market bottom based on Elliott Wave theory. The SPX has also confirmed this as a bear market bottom.

The NDX is above its 50-day moving average and that average was tested and held with last Friday's selling and this Monday's rally. The NDX is far above its 200-day moving average. Both of these averages are rising.

The NDX has closed above the critical 61.8% retracement resistance level at 1772.03 and also the 1800 level. This forecasts continued higher highs in coming weeks.

The NDX portion of this strategy is in a BULLISH position and in the Rydex NDX 100 Fund - RYOCX  (or other bullish NDX 100 index fund).