The Santa Rally Begins

I was saying yesterday morning that coming into Fed day just under clear pattern resistance augured badly for bears, and so it turned out. After a test break above SPX falling channel resistance SPX pulled back, made a new RTH low immediately after the Fed announced tapering to start in January, and then broke up for a massive short covering rally as people realized at last that cutting bond purchases from $85bn to $75bn per month wasn't really much of a change after all. The move from the post Fed low into the high just before the close was an impressive 45 handles as a lot of traders were forced to eat their shorts.

My EW analyst friends Pug and Alphahorn both nailed this move very well, as ever, and Alphahorn's model portfolio moved back into longs near the low last week as Alphahorn tries to beat his 2011 model portfolio return of 75%, though we'll need a strong move into the end of the year to put him over the top for that as I think he's only at 65% or so at the moment. I have been a member at both of their sites for years now, and they are both outstanding chartists and analysts with a lot of happy members. If you are trading in any kind of size then memberships at their sites is a relatively modest and very worthwhile investment in my view.

Alphahorn suggested an intriguing possibility in a note to his members half an hour before the Fed announcement yesterday and that was that the retracement pattern on SPX might be a falling wedge. The post Fed low almost made it to wedge support and then it broke up to make target shortly afterwords. Was this a channel or wedge? Both I think, as you sometimes see setups that are both. It made a better channel overall I think but that was some really slick classical chartwork from Alphahorn that brightened my day. SPX 15min chart:

RUT broke up hard with everything else but there was one exception at the end of the day on TRAN. I had prepared the TRAN chart in the morning while working my way through the US indices but didn't use the chart in my post because channel resistance was so far above resistance on other indices. I was surprised then to see at the end of the day that the high yesterday was a perfect test of the falling channel resistance trendline that I drew in the morning. What does this mean for the bullish breaks yesterday? Not a lot really , but obviously TRAN will also need to break up from this channel to end the current downtrend there. TRAN 15min chart:

SPX obviously broke hard over the daily middle bollinger band yesterday, and isn't that far away from a test of the upper band, which closed yesterday at 1817.81. As and when that is tested, which could be today, I'd expect any uptrend to stay fairly close to the upper band. The middle band (also the 20 DMA) will need a couple of days to turn up, but after that this can rise at 5-7 points per day in a strong uptrend. SPX daily chart:

How much room for further upside is there here? The main resistance is the SPX weekly upper bollinger band, and I was saying a few weeks ago that could only rise at 10-15 points per week in a strong uptrend, with punches above being rare, so decent retracements would be needed to open up space above for impulse waves up. The retracement just ended has the weekly upper BB now at 1846, and that could be in the 1850-60 area buy the end of December, and as high as 1890-1920 by the end of January. My rising wedge target that I posted in June is in the 1965 area, so it is coming into range over the next few months. SPX weekly chart:

So what about bonds? Bernanke repeated the usual nonsense about QE keeping long term yields low, when the reality is that all big spikes in yields in the last few years have been during QE periods, but for the short term at least the Fed announcement has broken the current rising wedge on the TNX (10yr treasury Yields) chart. There is a possible small double-top forming there and also a possible large double-top if TNX can get back to the valley low at 24.71. This is worth bearing in mind as very strong rallies on bonds (and declines in yields) start near or at the end of QE periods, and this is a warning that might be starting now, even though this taper is very modest and the Fed so doveish and hesitant here that QE doesn't seem likely to be meaningfully reduced for quite a while yet. TNX 60min chart:

On the bigger TNX picture I have TNX breaking up from a ten year falling wedge on the weekly chart, and I'm consequently rather doubtful about the larger double-top playing out, but it's worth keeping an eye on. The green shaded areas on the chart below are QE periods, so you can see at a glance the real effect that QE has had on bond yields in the past. TNX weekly chart:

Overall the Santa Rally is on, and I'm not expecting to see another big retracement for January at the earliest. I'd recommend buying the dip over the rest of December.

I mentioned yesterday that I am having some problems with my main trading computer and I have a question for any techie readers today. I'm reloading my OS etc onto a new hard drive later which should buy me some time, and will fix the problem if the issue is software or my hard drive, but if not then the problem could of course be with the CPU, RAM, motherboard, graphics cards etc. Does anyone know of any good testing/diagnostic software to test these components and identify any problems there? I built the computer myself a while ago out of top quality components so if I can trace the problem I can swap out any faulty components easily enough.