The last two trading days of 2011 reflected late portfolio repositioning and tax selling. Friday opened higher, but from mid-morning to the close sellers dominated the tape and the session ended with a blast of selling that had little to do with either fundamental or technical analysis. As a result, we may have been provided with a quick trading opportunity in 2012.
On Friday, the Dow Jones Industrial Average closed lower by 69 points at 12,218, the S&P 500 lost 5 points and closed at 1,258, and the Nasdaq fell 9 points to 2,605. Volume on the Big Board totaled 588 million shares, and on the Nasdaq 310 million shares traded. Breadth registered slightly more decliners than advancers on both exchanges.
While the more quality oriented index, the Dow Jones Industrial Average, closed higher for the year, up 6%, the Nasdaq ran into a host of difficulties and closed the year down 1.8%. It was the worst performance of all the major indices and the result of a difficult time for banks and technology stocks.
However, despite last week’s sell-off, the Nasdaq did manage to close slightly above the 2,600 resistance line that has been the center of trading since June. Its next resistance is very close-the 50-day moving average at 2,615. And its stochastic, with a strong buy signal in mid-December, is telling us that the index may be poised to jump to its next resistance, the 200-day moving average at 2,661.
The S&P 500 appears to be running into difficulty at its crucial bearish resistance line (red dash downtrend) at 1,259. Three attempts to cross that barrier have failed. And now the index’s difficulties have been doubled with the combined resistance of the 200-day moving average and the downtrend line at exactly the same level: 1,259.
Its last high at 1,269 was higher than its prior high at 1,267, and that’s an encouragement to the bulls. But the lower level of advance from the stochastic is a “divergence” telling us that something has got to give. A pop through resistance, along with a turn higher by the stochastic would be a powerful buy signal, and so investors should focus on this possibility but not act until the signal is flashed.
Since late October, the U.S.markets have been dominated by the higher U.S. dollar and its inverse impact on stocks. But the dollar appears to have run into difficulty as momentum lags and the stochastic, as illustrated by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), flashes a sell signal. Support now rests at the channel support line and its 20-day moving average at $22.36 to $22.39. If UUP can’t hold this crucial support line, stocks could pop into the new year with an impressive start.
The 17-month chart of the S&P 500 has been a reliable indicator of major changes in direction for many years. Although not perfect, this method of technical simplicity has a predictive record that rivals most other more sophisticated technical tools. In 2011 it flashed a double signal, sell then buy, which is unusual — in fact so unusual that we have to go back to 1998 when a double signal led to a major bull market.
Conclusion: Our technical studies indicate that at least a short-term change may be developing, i.e., a strong bullish break into 2012. A combination of indicators is on the brink of turning bullish, and so it is time to dust off your list of candidates to buy and either place limit orders to buy or wait for a strong signal. If the anticipated breakout occurs, prices could quickly run to 1,325 to 1,360 on the S&P 500.
If you’re looking for help making profitable trades in the new year, my colleague Joe Burns just closed a Baidu.com (NASDAQ:BIDU) trade for a 158% profit, a First Solar (NASDAQ:FSLR) trade for 143.75%, and a Google (NASDAQ:GOOG) trade for 80%. Get in on his new trades now.
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.
