Watch out! Stocks are preparing for an explosive move in January

Controversial trader who told the BBC “Goldman Sachs rules the world” gives his verdict

Our columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own, and in no way endorsed by LondonlovesBusiness.com.)

For the first time in twelve months we are seeing a “squeeze” on the weekly charts of the Stock Markets – namely the S&P 500 (ES) index.

A squeeze means the market is brewing for an explosive move.  This is because markets, just like everything else in the natural world, go from phases of low volatility to high volatility and then back to low volatility.  A squeeze signifies that transition from LOW to HIGH volatility.

I like to keep an eye for those moments in the market as they prepare us for the big market moves.

Take a look at what happened the last time a squeeze like this “fired” a signal back in December of 2011 (see chart below):

As you can see, the squeeze fires when bollinger bands (blue lines) exit the keltner channels (red lines). This sent the stock market flying from 1255 to 1406 within three months! That is a gain of almost 12% by March 2012.

However, a squeeze does not tell us the direction of the move.  We do not yet know which direction the market will “breakout” once the squeeze does fire a signal – and we don’t know when this will happen.

But there are some clues…

The current trend of the markets is still upwards, so the probability is greater that we could see the market break further higher to continue the uptrend. However, a move to the downside cannot be ruled out.

A key market to watch is the Bonds (see chart) – which typically move in the opposite direction to stocks:

We can see that Bonds are also in a squeeze – and they don’t show any sign of weakness as yet. Because Bonds are a bigger market – they will decide what will happen to stocks. If the squeeze on Bonds “fires” long (to the upside) this could mean very bad news for stocks (and vice versa).

Sentiment readings show that smart money and dumb money are tied as both are 50% confident in a stock market rally (this is according to research by Sentimentrader). So that doesn’t really help us.

I don’t expect any fireworks from stocks (and bonds) until January 2013. We are too close now to the end of the year and markets tend to wind down in the final few weeks.

As the above chart of stocks shows, the December 2011 squeeze on stocks did not fire until January 2012. So come this January and February 2013 be prepared for a lot of volatility and action in stocks.

For further information about trading the markets visit my website www.LeadingTrader.com.

Alessio Rastani gained fame and caused controversy last year by stating live on BBC news that he “dreams of another recession” and that “Goldman Sachs, not governments, rule the world”. The YouTube clip has since been watched over two million times, and Alessio has subsequently been interviewed by figures such as Sir David Frost. His website is LeadingTrader.com.