As I noted last Friday, it looks like the typical December rally I was expecting will be postponed as there’s some gap-fill work beckoning on the downside.
Despite the happy rally after the Fed announcement (and the curious absence of volatility in the bond market), the S&P 500 only managed to rise to its key resistance ledge: the Volume Profile Point of Control (VPPOC) currently at 2071. This level acts like a floor or a ceiling… and it is acting more like a ceiling every day. (See accompanying chart.)
While I didn’t factor in a retest of the VPPOC from below, my scenario for December appears to be playing out. There is a huge gap in the price chart of the S&P 500 from the Ebola drama during October 2014 that needs to be filled. I wrote:
“After the Fed announces a rate increase next week I suspect that the market will sell off precipitously and head for that gap zone (1935-1948). Stops will be run and the rank and file will be convinced we are starting a new bear market.”
But I also added the following:
“I doubt that interest rates at 1-2% will kill the uber-bull. Instead, if we get down there, I will be looking for a surprise rally off the gap zone (red lines) that mysteriously takes the market to new all-time highs, thoroughly confounding almost everyone in the process.”
If this scenario makes sense to you, consider reducing or hedging short-term long exposure and do your best not to get bearish at the lows. Instead, look to buy the strongest of the “FANG” stocks way down there. If the FANG stocks can’t rally much from that level, then the bull is indeed… dead.
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