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Monday, December 3, 2012

This Technical Feature Could Determine the Market’s Next Move

Indices are overbought and could correct down, but there's a more important factor to watch

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Dec.3, hot stock picks .- The stalemate between President Obama and House Speaker John Boehner continued on Friday, keeping investors on the fence. Both stuck with their original positions, and the president seemed unwilling to discuss spending cuts. 
The market was relatively flat most of the day until the rebalancing of MSCI’s stock indices caused a sudden spike up just one minute before the close. Volume jumps when funds that track indices balance their portfolios to reflect the changes. But the spike’s gains were erased on the close, and the indices ended flat.
At the final bell, the Dow Jones Industrial Average was up 4 points to 13,026, the S&P 500 was unchanged at 1,416, and the Nasdaq fell 2 points to 3,010. The NYSE traded 1.2 billion shares and the Nasdaq crossed 669 million. On the Big Board, advancers exceeded decliners by 1.2-to-1, but on the Nasdaq, the ratio was even.
For the month of November, the Dow fell 0.5%, the S&P 500 rose 0.3%, and the Nasdaq jumped 1.1%.
Despite the wrangling over the fiscal cliff and the world’s continuing woes, our monthly chart of the S&P 500, plotted with a 17-month moving average, clearly shows that the bull market is intact. 
The S&P 500’s big September gain, due to Fed easing, was followed by a correction in October due to European troubles, a quiet Fed, and mounting fear over an impending fiscal cliff.
November opened with a sharp sell-off, which was followed by a recovery. The first was due to the market’s initial reaction to the re-election of President Obama and evidence that Europe’s debt crisis was having an impact on the German economy. The mid-month reversal rally was triggered by comments by both Republicans and Democrats that a fiscal cliff deal could be done before the end of the year.
By Friday, the S&P 500 had regained all of its early losses and closed above its 200-day moving average, as well as the breakdown line at 1,403. But it is restrained by the 50-day moving average and a short-term overbought condition shown by the MACD indicator, which, nevertheless, is still on a buy signal. 
The Dow, like the S&P 500, rallied from its November low, but with less gusto than the S&P 500, due to profit-taking and fear that the settlement of the debt issue would have a negative impact on dividends.
Since the Dow is loaded with high-quality dividend payers, the index lagged the advance of the S&P 500. It barely closed above its 200-day moving average, but failed to penetrate its breakdown line. The zone between that line and the 50-day moving average at 13,199 looks like a significant barrier that could easily slow down a further advance.
The Nasdaq’s sharp rally is in contrast to the relatively lethargic bounce of the Dow. The composition of the Nasdaq, which has relatively fewer dividend payers, illustrates the significance of the future taxing of dividends to market performance.
Like the S&P 500, the Nasdaq ended November between the support of the 200-day moving average and the resistance of the 50-day moving average. It, too, has an overbought MACD while still on a buy signal.
Conclusion: Despite political and economic uncertainties, the bull market is intact. The technical picture provides guidance. For example, on the S&P 500 chart, note the market plunge in early November when prices broke the support line at 1,403. Now note the current narrow range of trading between the 50-day and 200-day moving averages on both the S&P 500 and Dow — a break in either direction would be significant. Finally, the MACD buy signal marked the November sell-off bottom — the bounce was straight up with hardly a correction on the Nasdaq. 
Currently, all indices are overbought and could correct down, but price action is more important than the internal indicators, and so the price action at the 50-day and 200-day moving averages is the technical feature that will determine the next near-term move of the market. ...
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