Will Wednesday’s 5% Surge Kick Off a Year-End Rally?

Wednesdays surge was so impressive that its worth taking another look at it
from the distance of a few days. A quick thumbnail technical analysis allows for
only one conclusion: Stocks will rally further. The Dow soared nearly 500
points, the S&P and Nasdaq finished up 4.2% and small caps led the charge with a
5.8% gain. The VIX is 27% lower today than on Nov. 1. Trading volume on the NYSE
clocked in at 1.66 billion, over 60% above the 10-day average. Up volume
accounted for 97% of Wednesdays trading. Assuming that this rally has further to
go seems like a slam-dunk. But a little bit of perspective is never bad. We saw
a similar price and volume surge on Oct. 27 when the S&P pushed as high as
1,293, and the Dow as high as 12,284. NYSE trading volume that day was almost
40% above the 10-day average. The Oct. 27 explosion lifted 94.5% of stocks above
their 10-day average, while Wednesdays squirt propelled 93.6%, but (and thats a
big but) stocks tumbled more than 10% following the Oct. 27 performance (more
about what that means in a moment). High Probability Profits When it comes to
trading, its all about identifying high probability entry or exit points. There
are always new trading opportunities, but the best opportunities are those where
all stars (indicators) are aligned for a profitable trade. The three best
indicators, in my humble opinion, are a composite of technicals
(support/resistance levels, Fibonacci analysis, trend lines, patterns, buy/sell
signals, etc.), sentiment and seasonality. A high probability trade sees all
three indicators pointing in the same direction. Along with a few minor setups,
weve gotten two major high probability signals this year: A sell signal in May
and a buy signal in October. In April, the S&P was closing in on major technical
resistance, investor sentiment was outright bullish (which is bearish from a
contrarian point of view) and seasonality was turning bearish (sell in May and
go away). The Apr. 15 ETF Profit Strategy Newsletter warned that: A major
secondary market top is forming. It would simplify our forecast if the S&P would
be able to reach the ideal 1,369 to 1,382 target for a major secondary market
top before the summer doldrums. The S&P topped on May 2 at 1,371. The rest is
history. Exactly the opposite was true at the October lows. The Sep. 23 ETF
Profit Strategy Newsletter provided this outlook: From its May high at 1,370 to
its eventual low, the S&P will likely have lost about 300 points (22%). This
kind of move validates a counter trend rally. Any drop below 1,088 may mark the
end of the 2011 bear market leg. Such a drop may be only on an intraday basis.
The S&P exploded 20% from its 1,075 intraday low on Oct. 4 to its 1,293 high on
Oct. 27.