In early November the market told us that the preponderance of data suggested that there indeed would be a year end rally. Up until that point, we had held a short view throughout October. Now it's December. What does the data tell us now?

The first thing it tells us is that the ability to move higher from the current levels will be much more labored if indeed that is to happen. That is told directly through the 10 day net differential chart that we keep on the NYSE.

If you look at the 30 day differential chart also is lining up with the 10 day at this point. Although it could rise further, the two are beginning to reflect a seriously overbought market.

Now if you look at daily SPX chart as a good proxy for the general headline indexes, it is showing us that we are reaching the danger zone as well from a price stand point. If you look closer you will also notice that from a time standpoint we have an extended market (6 to 7 weeks of straight up action until this past week's dive and then drive higher). Look back at the save time period last year and you will see almost the exact same behavior. A push straight up through late October until the middle of November and then a lot of up and back action for a two week period. We are at that point now most likely.

Looking further, you can see that despite the overbought nature, the bonus boys (those who stand to gain significantly on Wall Street if the market stays here or moves higher in price) continue to push the market higher and higher on less and less volume throughout December of last year. Will this be repeated once more? The current momentum suggests that it has a good chance.

The problem with all of this is January of this year. The market typically gets that January bounce going but last year was very different as the artificial gains were taken back right at the beginning of January. If we see a low volume push through the end of this year, I would be quite wary of what January brings once more.

Conclusion

The short term outlook is one of difficulty with respect to a continued rise. There are enough factors as shown above that suggest that some caution is due at this juncture. The short term outlook is difficult and we could see a pullback that runs deeper than what was shown on the big drop this week. On the other hand, like last year, we could see the bullish momentum allow this market to work off the overbought condition without a significant drop but instead through a consolidation period at the current general price levels.

Unless there is a significant and unexpected drop in prices (where key support is broken) over the course of the next 5 to 10 trading sessions, look for prices to work their way higher into the end of the year. The idea situation is for a pull back that allows one to replenish there long positions at better price points. If that doesn't happen, then waiting for the consolidation period of 2 to 3 weeks is wise before beginning to increase your long positions. The intermediate term rise is still in tact and should be respected.

Longer term, the next 6 to 8 weeks is likely to define the success or failure of stock prices for the first half of 2006. There are some key resistance areas that are currently being tested as well as some longer term patterns that are of interest. Either the market is going to be break higher or it will respect the resistance areas which will lead to a more serious bear market. I'll turn my attention to that picture in the next iteration of Naked Trades.