Market’s Small Loss May Have Much Bigger Implications

by Sam Collins | December 5, 2012 2:04 am

Considering all that is at stake in the fiscal cliff negotiations, Tuesday’s trading was relatively subdued and in a narrow range. And there were no economic reports on which traders could focus their attention.

At Tuesday’s close, the Dow Jones Industrial Average was off 14 points at 12,952, the S&P 500 fell 2 points to 1,407, and the Nasdaq was down 6 points at 2,997. The NYSE traded 674 million shares and the Nasdaq crossed 410 million. Decliners slightly edged out advancers on both exchanges.

UUP Chart
Click to Enlarge

Trade of the Day Chart Key

U.S. stocks usually move opposite to the value of the U.S. dollar. But on Monday and Tuesday, they moved together — down.

The dollar is approaching support on the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP[1]), and if it holds, stocks would most likely revert back to the normal pattern, i.e., fall. Also note that UUP has a slightly oversold Relative Strength Indicator (RSI).

SPX Chart
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Monday’s key reversal day[2], when the S&P 500 opened higher than the prior day and closed below that day’s low, was followed Tuesday by a small decline. But that small decline is of significance since it confirms the validity of the reversal as it smashed through the support line at 1,403.

The next line of support for the S&P 500 is the 200-day moving average at 1,385. MACD is now overbought and the fast line (red) is beginning to curl down.

Conclusion: Monday’s key reversal day appears genuine, since it was executed by the Dow, S&P 500 and NYSE Composite. Therefore, expect stocks to pull back to the next level of support.

For the Dow, it is the support line at 12,780; for the S&P 500, it is the 200-day moving average at 1,385; and for the Nasdaq, it is the 200-day moving average at 2,987, but because that support is near Monday’s close, look for the Nasdaq to retreat to the line at 2,890.

It appears that unless the D.C. elves can solve our fiscal problems, Santa may not have his rally this year. All eyes remain on Washington.

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. UUP:
  2. Monday’s key reversal day:
  3. click here:
  4. click here:

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