Cover All Shorts Before Santa Comes to Wall Street

by Sam Collins | December 19, 2012 2:58 am

Rumors persist that fiscal cliff negotiations are accelerating to a phase where both parties feel that a deal can be negotiated. The logjam appears to have been broken when President Obama reportedly compromised on the annual income level for higher tax brackets.

A positive report from the housing sector helped the market, as well. U.S. homebuilders’ confidence rose in December to the highest level in six and a half years, according to the National Association of Home Builders.

At Tuesday’s close, the Dow Jones Industrial Average rose 116 points to 13,351, the S&P 500 gained 16 points at 1,447, and the Nasdaq jumped 44 points to 3,055. The NYSE traded 818 million shares and the Nasdaq crossed 443 million. On the Big Board, advancers exceeded decliners by 2.8-to-1, and on the Nasdaq, advancers were ahead by 2.6-to-1. Also, on the NYSE, upside volume exceeded downside volume by over 6-to-1.

DJT Chart
Click to Enlarge

Trade of the Day Chart Key

On Monday morning, I noted[1] concern that the Dow Theory was in “non confirmation” since the Dow transports had not followed the lead of the industrials to a new high. It’s almost freakish that the index then jumped 84 points, for its best day in months, and broke through its bearish resistance line. It’s still a long way to the high of February at 5,425, but this move to a more bullish outlook is encouraging.

Nasdaq Chart
Click to Enlarge

Aided by a strong day in the technology sector, the Nasdaq broke away from the support of the 50-day and 200-day moving averages at 2,990, crushed the December high of 3,033, and opened a small breakaway gap.

Only 0.58 of a point now separates the two moving averages, and a down day would trigger a death cross. But the MACD arched up Monday from the power of the advance.

Conclusion: Monday it was again the headlines that dictated the action, giving the bulls an opportunity to take charge. In just one day the technical picture has brightened.

As we enter a period that is usually strong for stocks, the S&P 500 broke through the stubborn resistance line at 1,450 (see Dec. 17 chart[2]), the Nasdaq jumped from support at its important moving averages, and the Dow Jones Transportation Average broke an important resistance line.

The last quadruple-witching expiration week before year-end occurs this Friday, and that is usually a strong day for the bulls. A Santa Claus rally occurs 65% of the time in the week between Christmas and New Year’s, according to Raymond James’ chief investment strategist Jeffery Saut. And the fiscal cliff negotiations appear to be drawing to a conclusion.

With so many positives it is likely that the old year will close on a confident note. Therefore, all shorts should be covered. It is not yet the time to go into a Christmas buying spree since a breakdown in the fiscal cliff talks could reverse the markets. But traders may want to play the long side through early January.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. On Monday morning, I noted:
  2. see Dec. 17 chart:
  3. click here:
  4. click here:

Source URL:
Short URL: