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

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tdp2664 InvestorPlace Wednesday’s surge was so impressive that it’s 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 Wednesday’s 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 Wednesday’s squirt propelled 93.6%, but (and that’s 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, it’s 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, we’ve 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.