The bulls have been following the Santa Rally theme to a T and the index has not done much besides go higher, following the script exactly. But the SPX (S&P 500 Index) has been in an “All in/All out” mood for quite some time now. We are seeing less and less breaks in direction, once that direction has been defined.
Since April, the SPX has seen five “defined” short-term trend changes and has traveled up/down/up around 850 points. That is a lot of points to move in an 8-month period.
Sentiment has been stretched to the bullish end of the spectrum, but there is still room for the intermediate-term sentiment to move into the extreme bullish zone. This is all matching up with the expected turn dates defined by the sentiment timing index (1st week in January).
The sentiment-turn dates also project the SPX to touch the top of a bearish rising wedge that has been forming since 2010. The top of the wedge would give the SPX a target somewhere between 2115-2130, which may come right on one of the expected turn dates in early January.
If the bearish pattern is going to play out as it should, the next drop to the lower trend line should hold and we would then see another push to the top of the wedge. That is when things may get a bit scary for the bulls, as it should be the last touch before breaking down and below the lower wedge line.
If 2130 is the top area, the target for the bearish rising wedge would be almost 800 points lower (1320-ish).
Although patterns do not always play out, they are worth watching and this is one worth watching.
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To learn more about sentiment timing, please click here.
