Get Ready for a Six-Week Rally in Stocks

By Jeff Clark (Growth Stock Wire | Original Link)

Everything is falling into place for a year-end rally in the stock market.

Last week, we took a look at the U.S. Dollar Index. And we noted how it was zeroing in on the upside target we set for it a couple months ago.

Since stocks tend to trade inverse to the dollar – or at least they have for the past few years – a peak in the Dollar Index should coincide with a bottom in the stock market.

Now, after last week’s decline, the S&P 500 has hit our downside objective

There may still be a little more room for stocks to fall. But if you think we’re going to get a traditional “Santa Claus” rally, this is a pretty good time to start preparing for it.

Take a look at this updated 60-minute chart of the S&P 500…

Updated 60-minute chart of the S&P 500

The head-and-shoulders pattern we highlighted last month played out. The S&P 500 is now sitting right on support around 1,378. From here, one of two things could happen… Stocks could bounce and kick off a year-end rally… Or support could fail, and the index could drop toward stronger support at 1,360.

Stocks are plenty oversold now to justify a bounce. It’s reasonable for traders to take a small position here to test the waters. If the S&P 500 can rally back above 1,400, it’s a safe bet the recent decline phase is over… and Santa Claus is on his way.

On the other hand, a drop down to 1,360 would push a number of technical indicators into “extreme” oversold territory. It would stretch the proverbial rubber band about as far as it could go… and set the stage for a stronger bounce higher.

As a trader, I like the idea of buying a little right here… just in case. But I love the idea of buying near 1,360. If Santa shows up this year, he’ll likely pull the S&P 500 back up toward 1,430 – the broken neckline of the head-and-shoulders pattern. That would present a solid rally for the next six weeks.

It’s time to get ready for it.

Best regards and good trading,

Jeff Clark

Further Reading:

Jeff says paying close attention to the dollar is a great way to know when to jump into stocks. Learn more about it here: How to Know When Stocks Will Stage a Year-End Rally.

There’s another sector Jeff says could lead a year-end rally in stocks. A sign of strength in these stocks will provide another clue that a year-end rally is ready to unfold. Read more here.

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About the Author: The Stock Enthusiast