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Technical Analysis Weekly - More Evidence Needed, but a Trading Top is Possible

Friday Morning 01/27

( “’Attention must be paid.’ Mrs. Loman said of her husband Willie in the final scenes of Arthur Miller’s play, ‘The Death of a Salesman.’ It must be and we are…” – Dennis Gartman.

John Murphy, in his excellent book titled Technical Analysis of the Financial Markets, describes a “reversal day” as such:

... the generally accepted definition of a top reversal day is the setting of a new high in an uptrend, followed by a lower close on the same day. In other words, prices set a new high for a given up move at some point during the day (usually at or near the opening) then weaken and actually close lower than the previous day’s closing. ... heavier volume ... is (part of the signal) ... for a possible near-term trend reversal.

Such was the case yesterday. The DJIA (12734.63) was up 85 points, hitting 12842 - a new five-month high right after the open. Consistent with this, the “senior index” punched into resistance between 12781 and 12876 and, for whatever reason (there are many out there), reversed direction, closing down 22 points. A similar reversal, from up to down, was experienced by the NASDAQ and volume expanded relative to Wednesday’s levels on both the NYSE and NASDAQ.

With that said, one-day reversals need further confirmation before one can say with any degree of certainty, that a “confirmed trading top” has been registered. In other words, additional weakness that ideally is accompanied by heavier volume is necessary within a few days in order to lock in the top. Again, a confirmation of the reversal often appears within a few days of the actual reversal. If Wall Street immediately ignores the reversal day and sends stock indices higher, the signal is abandoned.

In the mean time, until there is a confirmation or abandonment of yesterday’s negative reversal, short-term oriented accounts should dramatically tighten stops, consider some pairs trades (I have one in the energy complex) and please continue to follow underlying support: SPX - 1296 to 1293 and 1277. DJIA - 12453 and 12312 to 12284.

The S&P 100 (OEX/596.62), shown below, is a good representative of the big-cap universe as well as an example of an index that ran up to resistance and reversed, intraday.

Chart courtesy of Thomson Reuters.

Thursday Morning 01/26

Resistance: S&P 500 (1326.06) - 1340 to 1347, 1356 and 1360 to 1370. DJIA (12756.96) - 12781 to 12876 (May 2011 peaks)

Support: S&P 500 - 1296 to 1293 and 1277. DJIA - 12453 and 12312 to 12284.

Higher Troughs and Higher Peaks = Uptrend (but please don’t be complacent, sanitize portfolios of technically weak stocks and fundamentally weak companies while only selectively buying): Remember when stock market moves were said to be aided by the “Greenspan put?” Well Mr. G. has nothing over Mr. B. (Fed Chairman Bernanke) and his announcement yesterday concerning interest rates. Yesterday was the second consecutive day in which an early sell-off was greeted with a continuing interest to “buy the dip.” This was evident by the stock market’s ability to absorb a 100-point decline by the DJIA as the “senior index” closed up over 80 points. The NASDAQ outperformed (please refer to 1/19/12 report for a chart depicting technology leadership), gaining 32 points.

There were 1604 net advancing issues, a great number, but aided by the strength in the small- and mid-cap complex as well as the rally by the fixed income market. NYSE volume expanded to 830 million shares - “positive” and still not close to a reading that would imply a “climax top.”

?As accurate as I have been with the U.S. Dollar Index (both to the upside, and more recently, to the downside) and concurrent observation about the euro, I have been equally wrong, if not more so, with Gold, defined by the SPDR Gold Trust (GLD). I have completely missed GLD’s big move up off the lows.

Now, while GLD has penetrated a downtrend line drawn off its September peak, which is bullish, until some type of consolidation or pullback develops, I prefer to shift my interest to the Market Vectors Steel Index Fund (SLX). It looks to me that SLX is scratching out a bullish pattern of accumulation - inverse head and shoulders. However, similar to FAA shown below, due to SLX’s proximity to resistance, proactive accounts should only use a pullback to buy or, if the downtrend line is violated, establish a partial position, all while having a stop loss point identified.

? Consistent with an earnings-induced topside “trading pop” from DAL, due to resistance at $31.50, proactive accounts only should use pullbacks or consolidations in the Guggenheim Airline ETF (FAA) accordingly. Support = $30 and $29 to $28.38.

Charts courtesy of Thomson Reuters.

Wednesday Morning 01/25

Here are the recent newsletter advisory sentiment figures and a paraphrase of some comments from Investors Intelligence:

Stocks advanced smartly over the last week. All indexes are now above their October highs, at their best levels since at least July 2011. The NASDAQ 100 set a new 10-year high. Sentiment was little changed. The BULLS were unchanged at 50.0% - some BULLS expressed concern over the short-term overbought conditions and the BEARS were lower at 28.7%. A further contraction by the BEARS to the mid-to-low 20%s should occur before we are convinced the high for the market is at hand.

The spread between the BULLS and BEARS was +21.3%, up slightly. The recent spreads are still well below the +28.0% reading shown in July and the +40.0% difference last April, so a top is not yet signaled. This is a contrarian indicator, so wide negative spreads [below zero] are signs of low risk for new positions. The current rising positive reading [above zero] suggests increasing risk, with 30% the first major danger level for a rising market – see chart below.

Relative to yesterday’s tape action, the stock market had a cautious tone as investors looked ahead to last night’s State of the Union address, the Fed’s two-day FOMC meeting, a stalemate between European policy makers and Greek bondholders and AAPL’s earnings report. At the final bell, while the DJIA and S&P 500 were lower, the NASDAQ, SML, and MID closed higher and there were more advancing issues than declining issues on the NYSE. In other words, it was a mixed session, with “winners” and “losers.”

Besides the DJIA (12675.75) fighting with “twin peak” resistance (selling pressure) “in and around” 12750, the S&P 500 is still fighting with resistance, “in and around” 1316 to 1322, shown below. Yes the stock market is overbought, but by many measures, it has been overbought for weeks and not significantly corrected. Could it happen now? Yes, but it could also simply consolidate or pullback marginally (1-3%). Please recall that, many times as the stock market approaches an important level of resistance, it pauses at or below said level or moves marginally through it and then pulls back as profit taking takes hold.

However, due to the positive trends by the advance decline lines associated with the S&P 500, NYSE, and S&P 400 – charts shown on below, I don’t believe a consolidation or pullback will get out of hand. Initial support for the S&P 500 exists between 1296 and 1293, followed by a more important level of support at 1277—the January 13 intraday low.

Chart courtesy of Thomson Reuters.

Courtesy of Bloomberg and Raymond James research

Sentiment Chart:

Chart courtesy of Investors Intelligence, a division of Chartcraft Inc.

Monday Morning 01/23

Consistent with the fact that earnings-related price movements by IBM, MSFT, and INTC played a huge part in last Friday’s 96-point gain by the DJIA, the “senior index” is approaching resistance in the area between 12720 and 12754, defined by its July 2011 “double-top price peaks.” Please refer to the chart of the DJIA below.

In light of the chart of the DJIA and the S&P 500’s proximity to resistance (please refer to last Friday’s report for specifics), should there be a pause/or pullback, which shouldn’t be surprising, to keep the recent breakout valid and any pullback-consolidation contained, any setback by the DJIA should hold support between 12312 and 12284, defined by the mid-January low and late October 2011 peak.

Chart courtesy of Thomson Reuters.

Ultimately however, I think the July highs will be exceeded. I feel this way because, in addition to the pattern of “higher troughs,” as shown above, the “risk-on trade (Wall Street’s willingness to put money to work in stocks) is still working.

This is evident by the short-term breakdown in the iShares Barclays 20+ Year Treasury Bond Fund (TLT) – lower bond (higher interest rates), profit taking in the U.S. Dollar Index – higher euro short-term (overlay MACD on the euro and it looks higher short term), poor relative strength by the Utility stocks – financials, industrial and material stocks outperform, the recent outperformance of CAT versus MO and the stabilization, dare I say marginal improvement, of the Shanghai Composite Index.

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