» The Sub-Prime Second Wave? V Blog for Trading Success: Ray Barros

The technical picture is quite clear; it offers two choices as shown by Figures 1 and 2.

FIGURE 1 1966 to 1982 Sideways Scenario

FIGURE 2 1931 to 2007

There is obviously quite a difference in the two scenarios. In the first, we can expect to see a test of the 2007 highs in both the S&P and DJIA. In the second, we’ll see a full fledged bear market with a target of DJIA 761. That would suggest a dire economic situation.

The two scenarios also show different potential end dates.

We know that secular bear markets last an average of 13.75 years. We also know that the secular bull market for the S&P ended in 2000. If this is a normal bear market, we can expect it to end between 2011 to 2018. And, given my fundamental view, I’d lean more to 2013 to 2018.

But if the second scenario comes to pass, we are looking at the DJIA. The bull market on the DJIA topped in 2007. This projects an end to the bear market in 2018 to 2024.

The question is do we have any signs which of the two are likely to play out. We have some indication based on a seasonal pattern I call the Xmas Rally.

The first part of my Xmas Rally runs from the Friday before options expiration (in 2008, Friday 19th) to December 23. We should see a higher close on December 23 for a bullish indication; a lower close for a bearish one.

The next part runs from Dec 27 to the second Friday in January - in this case, January 9. I would like to see a higher close for a bullish case. If we do see a higher close, then we are likely to see a higher close on January 31 when compared with December 31. A higher January close suggests the “January Effect” will lead to an up year in 2009. The same reasoning applies if we see lower closes ie favour a lower close on January 9. If that happens, I’ll expect to see the 1931 scenario play out.

Why?

Because we are currently in the 12-M (yearly trend) Primary Buy Zone. We need to see prices reject off the Buy Zone to confirm that it will provide a base to launch the next up move. If we see lower closes leading to a possibility of down year for 2009, we are more likely in the 1931 scenario rather than the 1966.