The market ended a little lower yesterday in mixed trading all day. Such is unsurprising, given the massive run since the beginning of November. With the market extremely overbought, we have previously pointed out the risk of a pullback in the first few weeks of December before the traditional year-end “Santa Rally.” The chart below shows potential retracement levels for such a correction, providing logical entry points to increase equity exposure in portfolios if needed.
A 23.6% retracement would coincide with the 20-DMA, which is rising strongly and should provide initial support at that level. A failure at that minor support would then retrace the “gap up” in the index from early November. The 38.2% and 50% retracement levels are key support and will coincide with the 50-DMA. While a deeper correction to the 200-DMA, encompassing a 61.8% retracement, is possible, it is unlikely, given the market’s current momentum. However, if such does occur, it would likely coincide with the onset of either a much more “hawkish” Federal Reserve and/or substantially weaker economic data surfacing. For now, the 23.6% to 38.2% rectracements seem the most logical before a year-end rally.
Lance Roberts
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