Thanksgiving week is traditionally a short one for US equity markets. Thursday, the market is closed, and Friday, it opens for only half a regular day.
In other words, with most investors on holiday and banks closed, liquidity is simply not there for the market to make huge gyrations. This situation sets the perfect conditions for a stock market melt-up, and this year is no different.
US stocks have had a terrible year, but the bounce is nothing short of impressive. The rally from the lows is so powerful that one should not be surprised to see stocks reaching new all-time highs in December.
Pennant formation breaks higher during the Thanksgiving week
Take the Dow Jones index and how it has performed this week so far. A week before Thanksgiving, it consolidated in a tight pattern resembling a pennant formation.
Pennants are continuation patterns. The market eventually breaks in the same direction as the underlying trend.
The breakout came during the Thanksgiving week – unsurprising, considering Thanksgiving’s seasonality, as I mentioned here.
Can US stocks make a new all-time high?
The pennant formation on the Dow Jones daily chart suggests a new all-time high is in the cards. The measured move hints at another rally of about 3,000 points, which will bring the Dow Jones index to a new all-time high.
So what should happen for US stocks to rally in December? Two things come to my mind.
One is the upcoming inflation report. If inflation cooled even more in November, stocks should rally.
The second one is strongly related to the first one. If inflation cools, the Fed will slow down the pace of rate hikes, so stocks should rally some more.
All in all, shorting stocks during the Thanksgiving week is a risky bet. If the technical picture looks as bullish as it does now, than the safest place to be is on the long side.
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