SANTA CLAUS IS COMING TO TOWN!

For those that were waiting for a Santa Claus rally, you got a Santa Claus rally. Today was a painful day for those of us that were short the market. It happens...but you have to put things in perspective. Today's 490 point rally likely ranks in the top 15 Dow rallies of all time (I'm assuming this...I haven't verified if that's true). This means that it is a rare event. You can't change your entire trading system after a rare event. I don't believe that today's rally is kick starting a new bull market...but that doesn't mean that we won't move up a bit more. The key resistance levels to watch are 12,284 on the Dow (the October high) and about 1280 on the S&P 500. There is another resistance area around 12,500 on the Dow and about 1295 on the S&P 500. We closed today at the highs of the day and the volume was higher than normal. This usually means that we will go up a bit higher. Keep in mind that the first resistance area on the Dow is only about 240 points away. If we rally higher, keep an eye out for any divergences that could signal that the rally is losing strength.

I'm going to keep a neutral stance for now. I'm still bearish in the longer term, but I realize that we could move up a bit higher in the short term. I exited most of my FAZ and TZA options today. Options don't always recover very well when they've lost most of their value...leveraged options are even worse. We could get a 500 point drop tomorrow and they would still show a loss. I'm mostly in cash right now...except for a few spreads. I like it when I'm mostly out of the market because it allows me to look at things more objectively. The market looked like it completed a corrective rally on October 27th. The "pre Thanksgiving" drop looked like the start of a bigger move down. The rally on Monday and Tuesday looked like a correction within that bigger move down. That expectation turned out to be inaccurate. Like many of you, I had stops in place in case that outlook was incorrect. Like many of you, today's move blew through many of those stops causing a larger loss than was anticipated. Luckily my money management prevented that rally from destroying my account.

I know it's hard, but you can't focus on the past. Today's move is now behind us and the market could care less what happened to us today...good or bad. We now need to look at what new patterns are showing up. It now looks like the October high was the end of a wave A (of a bearish ABC pattern). Wave B looks like it ended last Friday (November 25th). This move up looks like a possible wave C that should complete that bearish ABC pattern and lead to that bigger move down. This is why we will watch those resistance areas as possible ending points. I haven't dismissed the possibility that there could be a prolonged rally off of today's move. History shows that governments (and central banks) can sometimes prop things up a bit longer before the ultimate collapse takes place. QE1 and QE2 managed to prop up our markets for an additional year. This is why I will be watching carefully for divergences or clues that could signal the end of the rally. I'll let you know if I see them...or if I feel the need to turn more bullish. Be careful not to make dumb decisions if you are dealing with a draw down. There is a natural tendency to want to get the money back right away. This often leads to impulsive trades or attempts to "bet everything" on a particular move. If this next move down is a big as I think it could be, it could bail just about anyone out of their draw down. The trick is to not go bust before you get that opportunity. For those who haven't suffered any major draw down, you could look at some short term trades on the DIA or SPY...call options. If you are down in your account, don't do anything right now. You will be in really bad shape if you load up on calls and we drop 500 points.