Expect a Bumpy Ride Between Now and New Year’s

Traders beware, we are entering a period of historically high volatility

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Dec.21, stock tips .- Stocks closed higher Thursday as a late rally turned a mediocre advance into a broad-based gain. Strong economic data attracted buyers and short covering: November existing home sales rose 5.9% versus October, the Conference Board’s Leading Economic Index for November declined 0.2% as expected, but the Philly Fed’s December index of business activity jumped to 8.1 from November’s -10.7.

At Thursday’s close, the Dow Jones Industrial Average gained 60 points to 13,312, the S&P 500 rose 8 points to 1,444, and the Nasdaq gained 6 points at 3,050. The NYSE traded 679 million shares and the Nasdaq crossed 383 million. On the Big Board, advancers exceeded decliners by 2.2-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1.

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As fiscal cliff negotiations appear to be failing, the U.S. dollar continues to fall. On Thursday, thePowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) fell under its intermediate trendline following a short-term sell signal on Tuesday. However, the stock market usually moves opposite to the dollar, and so this is another short-term bullish indicator for stocks.

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The Russell 2000 small-cap index bottomed in November, and since then, has been on a tear, appreciating more than 11%. The index is on a strong MACD buy signal and recently picked up a short-term buy signal from a cross of the 20-day moving average up through the 50-day moving average. At 851, the index is just 10 points from a new all-time high.

Conclusion: All of the major indices moved forward again Thursday. The NYSE rose to an annual high, the Russell 2000 is within reach of a new all-time high, and the Nasdaq has broken from major resistance. 

Normally the message would be clear: This is no time to be short. If the politicians are able to resolve the fiscal cliff problem, or even move spending cuts into the new year while deciding whom and how much to tax, the market could blow off to new highs. But traders beware, the House of Representatives failure to pass the Republicans’ Plan B casts enormous doubt that any deal can be worked out before the fiscal deadline can be avoided.

Meanwhile, we are entering a period of historically high volatility with quadruple-witching today and low volume in the week between Christmas and New Year’s. It is likely that stocks will swing wildly in both directions, but now it looks like the initial move will be down. ...