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Warning: This Rally Has Reached Its Limit

We have entered a danger zone; reversal appears highly likely


A combination of economic instability in Europe and a disappointing weekly jobless claims number in the United States led to a flat opening yesterday. But pending home sales in March jumped 4.1%, well above the 0.5% expected, and brought in buyers to the building and allied sectors. And the technology sector continued its run following the surprise earnings of Apple (NASDAQ:AAPL).

Despite earnings disappointments from Dow Chemical (NYSE:DOW), Aetna (NYSE:AET), Potash (NYSE:POT) and Cliffs Natural Resources (NYSE:CLF), the market rallied throughout the afternoon.

After a short round of profit-taking in the last 30 minutes, the Dow Jones Industrial Average closed at 13,205, up 114 points, the S&P 500 rose 9 points to 1,400, and the Nasdaq gained 21 points to 3,051. Volume on the NYSE totaled 780 million shares, and the Nasdaq traded 455 million shares.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

Yesterday, the S&P 500 penetrated the resistance line at 1,390 closing within a fraction of our April 10 target of 1,400.

On April 11, it appeared that the S&P 500 had held at the important support zone of 1,347-1,357, and so we concluded, “Traders should immediately cut loose their shorts. A 40-point bounce back to 1,400 is likely.”

This opinion was reiterated on April 18, when I said, “By popping above these barriers and Thursday’s high at 1,388, the S&P 500 has neutralized the near-term downtrend. To add icing to the cake, the stochastic flashed a new buy signal. Its next barrier is the 20-day moving average at 1,395.”

And on April 17, our Trade of the Day recommended staging into Apple at various prices.

Nasdaq Chart
Click to Enlarge

On Wednesday, Apple’s earnings surprise propelled the stock 50 points and drove up the tech sector and indices along with it. The Nasdaq’s chart, with its gap down on Monday and gap up on Wednesday, shows the impact of Apple on the market.

Yesterday, stocks followed through with another advance that ended with the Nasdaq less than 9 points from a major resistance line at 3,059.

DJT Chart
Click to Enlarge

Conclusion: One stock and its influence on the technology sector has driven the major indices to significant resistance zones. Low volume, coupled with anemic breadth, and a Dow Theory non-confirmation (Dow Jones Transportation Average down 56 points, Dow Jones Industrial Average up 114 points) indicate that the rally has reached its limit.

Traders, both intermediate- and short-term, should book their profits. Long-term investors should avoid chasing new purchases even if they make new highs. We have entered a danger zone and a reversal appears highly likely.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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