Expect the Market to Pull Back Before Month’s End

 A test of the S&P 500 line at 1,475 is likely in late February

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Feb.8, trading stocks .-  On Thursday, stocks opened lower on a spike in the U.S. dollar and worries over Europe’s debt structure. The early strength in the dollar caused weakness in commodities and commodity-related stocks. However, the afternoon session had a broad advance that overcame many of the early losses.

Last week, U.S. jobless claims declined to 366,000, which was slightly more than expected, but the report appeared to have little impact on trading. Consumer credit for December expanded by $14.6 billion, which beat expectations of $13 billion.
At Thursday’s close, the Dow Jones Industrial Average was off 42 points to 13,944, the S&P 500 fell 3 points to 1,509, and the Nasdaq also lost 3 points at 3,165. The NYSE traded 663 million shares compared with 447 million on the Nasdaq. Decliners exceeded advancers by about 1.55-to-1 on both exchanges.

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On Thursday, the dollar spiked up against a basket of currencies after European Central Bank (ECB) President Mario Draghi voiced concern over strength in the euro, and immediately after that the dollar jumped. This advance caused selling pressure on commodities and stocks.

The chart of the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) shows that it is at the top of a triangle that, if broken, could lead to a further advance. Note the buy signal from the MACD.

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The powerful January uptrend has slowed, as illustrated by the falling momentum graph. But despite the currency pressures, the low of the day rebounded from just under 1,500 to close in the higher range of the day.

Conclusion: It’s beginning to feel like old times with European concerns creating unwanted headline risks. The rate of advance has slowed, and a close under 1,500 could result in a quick penetration of the 20-day moving average line at 1,493 and a quick test of the major support line at 1,475. But the bull is very much in charge and a near-term pullback would be welcome for bargain hunters.

Ed Hyman, chairman and founder of ISI Group, may have it right. He recently said, “While many continue to look for a major sell-off, I just don’t think so, believing we will trade higher into the State of the Union [Feb. 12], which should serve as the bears’ chance to finally get a 5% – 7% pullback.”

I doubt that we will see a pullback to 1,400 (7%), but a test of the line at 1,475 is likely in late February.