On Friday, a combination of improving economic data and the president’s plan for a middle-class tax cut freeze attracted enough buyers to offset a weak opening. Technology stocks were strong, led by Apple (NASDAQ:AAPL), which ended the day up 1.7%.
At Friday’s close, the Dow Jones Industrial Average gained 4 points to 12,815, the S&P 500 rose 2 points to 1,380, and the Nasdaq gained 9 points at 2,905. The NYSE traded 734 million shares and the Nasdaq crossed 435 million. On both the Big Board and the Nasdaq, decliners were slightly ahead of advancers.
For the week, the Dow fell 2.1%, the S&P 500 was off 2.4%, and the Nasdaq lost 2.6%.
The CBOE Volatility Index (VIX) displayed an odd pattern on Tuesday with the index temporarily going to “backwardation,” an unusual situation where the current price of VIX rises above that for futures contracts expiring several months from now. It closed the week in “contango,” which is the normal state of paying a premium for volatility insurance in the future and not for the short term.
What all of this adds up to is extreme complacency, and since VIX is a contra-indicator, this means that prices will probably edge lower. The relative complacency is illustrated by the 2.6% move higher last week when the S&P 500 was off 2.1% compared with the 13% move higher on Oct. 8 when the S&P 500 fell 2.2%.
The S&P 500’s intermediate trendline from October 2011 to June 2012 and Thursday’s close at the 200-day moving average at 1,381 have been broken. This signals that an intermediate downturn is in force.
The support line at 1,403 was violated on Wednesday. That violation gave an initial target of 1,340. However, the more important trendline and moving average were subsequently violated as well, and so we must assume that a “correction” of up to 10% from the high of 1,466 will occur, which gives a new downside target of 1,319.
Note the MACD oversold condition, as well as the Collins-Bollinger Reversal (CBR) buy signal. Most often following a quick sell-off, the market will spring back due to short sellers covering positions for a trading gain.
Conclusion: Last week’s decline triggered an intermediate downtrend with an initial target of 1,340 and a final target of 1,319. However, due to a short-term oversold condition, I expect a quick rebound and continuation of short covering that could reach as high as 1,400. Traders should sell into rallies and long-term investors should expand their cash positions.
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.