Some Lessons Worth Noting

First if you watched my Santa Rally Video posted this weekend, you would have seen a comparison between this time last year and now, the major differences were a strong December for 2010 which made the Santa Rally more likely, also the Russell and NASDAQ-100 were leading and showed strong internals using the "Percentage of stocks within each average above the 50 day and 200 day moving averages) as well as the Advance/Decline volume line, all of which were much stronger in 2010, but the kicker and what made me skeptical of a Santa rally was the defensive nature of the market in which the Dow had shown the best internals, a Santa Rally or any other in  fact should see strong leadership from small caps like those in the Russell 2000 and by the NASDAQ 100, the leadership by the Dow this season pointed to a more defensive market.

Yesterday I also pointed out that over the last 3 months, whenever the percentage of NYSE stocks above their 200-day moving average reached the 37-40% area, we've seen a sell-off. (Click the link).

I also talked a lot yesterday about the head fakes setting up in the market in numerous posts as well as weakness in Financials and the selling off of credit.

Here are the charts and not surprisingly thus far, the IWM and NASDAQ 100 are being hit the hardest.

 I talk about this all of the time, but made mention of it many times yesterday, one of the last things we see before a reversal in the market is a head fake move and I explained why yesterday, it creates the momentum snowball effect, which explains the strange late Friday melt-up, it was used to lock longs in the market and appeal to their emotion of greed as they would usually exit the market on a long 3 day weekend. Above you can clearly see the DOW set up a head fake false breakout by hitting new highs in the local congestion, drawing in longs and creating demand.

 We saw these intraday as well with bullish ascending triangles that technical traders think should break out to the upside and thus often buy the pattern before a breakout, again GREED. Also note the percentage moves in each of the averages today.


 The IWM never made a daily head fake, but it did in yellow on an intraday basis out of a bullish ascending triangle.

 The NASDAQ-100/QQQ broke above the 200-day moving average yesterday setting up a head fake.

 It also saw an intraday bullish ascending triangle head fake breakout.

 And the S&P-500/SPY broke above the 200-day moving average as well as the intermediate trendline setting up a head fake.

Intraday we saw the same bullish ascending wedge do the exact opposite of what a century of technical analysis books have taught.

There are some important lessons in these charts about how the market works, some small things that we noticed like the lagging of small caps and defensive nature of the market in the Dow leading and the weak December trend. There are probably many other lessons and as you know, my greatest desire is that you learn what the markets truly are for yourself through WOWS rather then be a newsletter guru. We are all students of the market and many people will say that, but we have learned and didn't get caught in head fake moves that are so common.