% NYSE STOCKS OVER 50-DAY AVERAGE IMPROVES -- VIX INDEX BREAKS LATE NOVEMBER SUPPORT WHICH IS POSITIVE FOR STOCKS -- S&P 500 APPEARS HEADED UP TO EARLY NOVEMBER PEAK AT 1000

MORE STOCKS TRADE OVER 50-DAY AVERAGES... Last Friday, I showed an indicator that measures the % NYSE stocks trading over their 50-day moving average. At the time, the reading was only 30%. With most stock indexes having cleared that resistance barrier this week, the number of stocks trading over their 50-day lines has increased as well. Chart 1 shows the $NYA50R reaching 51% by yesterday's close. That higher reading also broke the downtrend line drawn over the May/August peaks. One of our readers asked how this indicator fared at previous market bottoms. I've gone back and checked every major bottom since 1970. In each case, this indicator moved back over 70%. Another factor present at most major bottoms was the ability of the indicator to exceed an important previous peak. In this case, that would be the late August peak at 61%. Since it's based on 50-day averages, this indicator tells us more about the market's "intermediate" trend than it does about the market's "major" (or "primary") trend. All it tells us at the moment is that the market's "intermediate" trend has strengthened. The indicator that measures the market's "major" trend is the % NYSE stocks trading over their 200-day average. That indicator is still at only 6%. With most 200-day averages so far above current prices, it's doubtful the $NYA200R will improve much over the short-run. The two indicators tell us that the "intermediate" trend has strengthened within the context of a "major" downtrend.

Chart 1

A WEAKER VIX INCREASES ODDS FOR A DECENT DECEMBER ... Last Friday's message also carried the headline shown above and reflected the fact that a weaker CBOE Volatility (VIX)Index is usually beneficial to stocks. I noted that the VIX had been trading below its 50-day average for at least a week at that time, and that it was bearing down on its late-November intra-day low near 50. I wrote that "any close below that level would signal more VIX weakness which would be positive for stocks". The daily bars in Chart 2 show the VIX trading below that previous low in today's trading. A close below 50 would turn the trend of the VIX from sideways to down. A falling VIX appears to support the continuation of the current rally through the rest of the month. The fact that December is usually a strong month is also encouraging. The Stock Traders Almanac also refers to a "Santa Claus" rally which usually kicks in during the last week of the year. Wouldn't that be a nice way to end the year.

Chart 2

S&P 500 APPEARS HEADED TO 1000... I've expressed the view several times in the last month that the S&P 500 appears capable of reaching its early November peak near 1000. That now appears more likely with its 50-day average having been exceeded. I'd like to tie the 1000 target with the percentage retracement parameters that Arthur Hill wrote about yesterday. The Fibonnaci retracement lines in Chart 3 are based on the distance traveled from the May high to the November low. Arthur wrote that an upward retracement of 38% to 50% was normal in a bear market rally (which we appear to be in). Chart 3 shows that the 1000 peak represents a 38% retracement of the previous six month drop which is usually a minimum upside target in a bear market rally. I think the S&P has a strong chance of reaching that target between now and yearend.

Chart 3

HOURLY BARS STILL LOOK POSITIVE ... The hourly price bars in Chart 4 show the short-term pattern of rising peaks and troughs in the S&P 500 since late November. It shows the S&P still stalled at overhead resistance just below 920. The fact that each reaction low has been higher than the previous one, however, is a positive sign. That pattern suggests that buyers have been more aggressive than sellers over the last month. The S&P needs a close over 920 to continue its rally attempt. Odds still favor that happening. It would take a drop below the mid-December low near 860 to signal that the rally attempt has run into trouble.

Chart 4