Over the last few weeks, I have been discussing the potential for a seasonal year-end rally. However, following the strong October rally, a correction was needed to provide a short-term oversold condition which would create a better risk/reward opportunity.

Two week’s ago I wrote:

“The expected correction began in earnest this past week. While there is no guarantee, with the market still overbought on a short basis, it seems most reasonable that a correction back to previous support levels (2040-2060) will likely find “buyers” betting on the traditional year-end rally. This also aligns with the more traditional pre- or post-Thanksgiving correction.”

While that target range was broken on Friday, as stocks closed sharply lower on very weak retail sales reports, the oversold condition needed for a reflexive rally was achieved. However, as I wrote this past weekend:

“With the markets NOW oversold, it will be critically important that support at 2020 is not broken. The next critical level of support is the short-term moving average (dashed blue line) at 2010, then 1990 at previous support levels from early this year. It will be important for the market to hold these current levels of support without violating it over the next few trading days in order to set up a more tradeable short-term rally.”

As shown in the chart below, the markets did not disappoint. Despite Japan slipping into its fifth recession in the last 5-years, despite massive infusions of capital, and the devastating attacks in Paris over the weekend, the market rallied strongly off of support as expected. 

More Than Meets The Eye

With “bad news” mounting almost daily from weak retail sales, plunging imports, spiking inventories, geopolitical risks, etc., market participants are once again “front running” the Fed will not hike rates in December. At least for now, low rates remain bullish as the liquidity spigots in Japan, China, and the Eurozone continue to flow.