Tape Favors the Bulls, but be Prepared to Run for the Exits

Near-term trend is higher, but a breakdown in fiscal cliff negotiations could send stocks reeling

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Dec.12, hot stock tips .- Stocks opened higher on Tuesday as rumors persisted that progress on the budget talks was being made. But just before the close, Senate Majority Leader Harry Reid said that Democrats don’t plan to propose any additional spending cuts, and the market took back half of its gains for the day. 

However, technology stocks had a strong day with Apple(NASDAQ:AAPL) up 2.2% and the technology sector up 1.4%. Biotech also led with Vertex Pharmaceuticals (NASDAQ:VRTX) up 4% and Gilead Sciences (NASDAQ:GILD) up 2.8%.

At Tuesday’s close, the Dow Jones Industrial Average gained 79 points at 13,248, the S&P 500 rose 9 points to 1,428, and the Nasdaq jumped 35 points to 3,022. The NYSE traded 692 million shares and the Nasdaq crossed 440 million. Advancers led decliners on the Big Board by over 2-to-1, and on the Nasdaq, advancers were ahead by 2.5-to-1.

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On Tuesday, the S&P 500 plowed through resistance at its 50-day moving average at 1,416, the stubborn line at 1,419, and the December high at 1,424. Technically, this puts the bulls on the offensive.

However, as positive as this looks, there is a broad band that represents possible sellers that must be overcome. That band was formed from late August to mid-October. Tuesday’s high at 1,434 pierced into the heart of the resistance, but prices backed away on the close. The resistance line at about 1,450 rests just above the midpoint of that range.

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The Nasdaq took up the pace as well, slicing through its 50-day moving average, but falling after it hit the November high at 3,033. Its next major resistance is at the neckline at 3,040 and, like the S&P 500, it must still plow through the overhead created by four months of trading from August to mid-October.

Conclusion: Tuesday’s break higher was in reaction to what was perceived to be better news on the budget negotiations. The other catalyst for the rally was a persistent rumor that the Fed will announce another quantitative easing plan today. Whatever the reasons, the tape action this week has been much more in favor of the bulls and near-term trends now point higher. 

But investors who venture into the market at this level should be prepared to exit if talks break down between the president and Republicans. Just before the close Tuesday, prices fell sharply on Reid’s negative comments on any further cuts in spending — an example of how a seemingly minor remark can have an impact on the market. ...