Market Forging Higher, Not Yet Warning of a Top

Any pullback should be viewed as a buying opportunity

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Jan.16, stock picks .- The Dow rose for the fifth straight day, despite a weak opening that reflected a lower-than-expected GDP number from Germany. Following the gap-down opening, stocks rallied for the remainder of the day, driven by blue chips and the retail sector, which responded to a better-than-expected sales report for December. 

Apple (NASDAQ:AAPL) closed below $500 for the first time in 11 months, falling 3.2%, and dragging tech-influenced indices, like the Nasdaq, along with it.

At the close, the Dow Jones Industrial Average was up 28 points to 13,535, the S&P 500 gained 2 points at 1,472, and the Nasdaq fell 7 points to 3,111. The NYSE traded 603 million shares and the Nasdaq crossed 388 million. Advancers exceeded decliners on both exchanges by about 1.2-to-1.

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The Dow industrials continued to push through light overhead resistance. Overall volume was light, but the lack of sellers helped the index to maintain upside momentum.

Note the turn up by the 50-day moving average — away from a possible negative cross through the 200-day moving average. The index had little trouble slicing through the resistance (now support) at 13,330, and so its next target is the October high at 13,588, and then finally the four-year high at 13,662. Its Relative Strength Index (RSI) is slightly overbought but not yet warning of a top.

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One of the remarkable technical events of the past 12 months is the breakout and blast-off of the Dow Jones Transportation Average. On Tuesday, the index set a new all-time high after breaking from a 10-month consolidation in early December. 

RSI is somewhat overbought, and Tuesday’s spike to new highs could lead to some profit-taking. But the momentum of this remarkable performance is usually predictive of a better-performing economy, and thus, a pullback in this or any index should be viewed as a buying opportunity.

Conclusion: Despite the lack of volume, stocks appear headed to new highs, boosted by better-than-expected retail sales and the anticipation of a better economic climate. Even the breakdown of the most influential technology stock of the decade (Apple), the fiscal cliff, and the threat of a U.S. bond default have failed to stop the advance.

The strength of a market’s performance is measured by its ability to withstand bad news, and on that this market scores an A+. ...