The Dow Jones Industrial Average burst higher for the fourth consecutive day on Friday, led by IBM (NYSE:IBM), up $7.86, and Microsoft (NASDAQ:MSFT), up $1.59. Both companies reported better-than-expected quarterly earnings.
But the big gains from the Dow didn’t carry over to the broad market, and we will look at some technical analysis that tells a graphic story as to why stockholders should be cautious despite the best start to a new year in 15 years.
At Friday’s closing bell, the Dow advanced 97 points to 12,720, the S&P 500 rose a point to 1,325, and the Nasdaq fell 2 points to 2,787. Volume on the NYSE increased slightly (due to January options expiration) to 927 million shares, and the Nasdaq traded 553 million shares. Advancers were ahead of decliners by about 1.4-to-1 on both exchanges.
The Dow industrials are in a powerful intermediate uptrend, but Friday’s spike led by just two stocks should make us nervous. First, spikes of this nature are most often followed by profit-taking, especially when confronted with a major barrier like the bull resistance line (12,800) and just above that the April 2011 three-year high at 12,928.
And note that the MACD is extremely overbought and close to a sell signal. Additionally, every one of our internal and sentiment indicators is overbought.
Even though the Dow industrials had a spike, the S&P 500 barely made it to the plus side of the ledger. Only a last-minute round of buying saved the index from a loss.
The leading index of the current rally, the Dow Jones Transportation Index, not only hesitated on Friday, but actually executed a minor reversal. It too is overbought and provides another reason for caution.
The Dow Jones Utility Average has been in a bull trend since early last year. But utility stocks are defensive and usually show strength when institutional investors decide to back off of more aggressive issues while still participating in an uptrend.
On Friday, the index not only gained but executed a positive Collins Bollinger Reversal (CBR), our proprietary indicator. Note that the utility average’s MACD is oversold and its other internal indicators are also oversold.
Conclusion: After a dynamic start to the year with the Dow advancing by 4.1%, the S&P 500 up 4.6%, and the Nasdaq up 7%, it appears that it is time for the bull to rest before launching an attack on the April high.
Vickers also tracks sentiment, and on Friday, they reported that insider sentiment has started to slowly weaken. Their Sell/Buy ratio has lost ground for two consecutive weeks.
They note that “this gauge can be volatile at times.” But they went on to say, “We note the broader and less-chaotic Total Eight-Week moving average has also started to slip.”
The bottom line is simple: Bulls can make money and bears can make money, but pigs get slaughtered. It is time to pocket some profits and wait for the next buying opportunity.
If you’re looking for help making quick options profits, you may want to check out my colleague Joe Burns.
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.
