Dow Likely to Break to New Four-Year Highs This Week

by Sam Collins | October 8, 2012 2:09 am

The reported drop in the September unemployment rate to 7.8% from 8.1% resulted in a strong opening on Friday. But the Labor Department reported that the U.S. economy added only 114,000 jobs instead of economists’ median estimate of 118,000. That, plus concerns about Europe’s debt problems, resulted in a topping of the indices by 10:30 a.m., and continuous selling throughout the remainder of the day took back the early gains.

At Friday’s close, the Dow Jones Industrial Average was up 35 points to 13,610, the S&P 500 fell fractionally to 1,461, and the Nasdaq was down 13 points to 3,136. The NYSE traded 605 million shares and the Nasdaq crossed 360 million. Advancers led decliners on the Big Board by 1.3-to-1, but on the Nasdaq, decliners were ahead by 1.2-to-1. For the week, the Dow gained 1.3%, the S&P 500 rose 1.4%, and the Nasdaq was ahead by 0.6%.

Dow Chart
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Trade of the Day Chart Key

The flag shown in the Dow industrials was broken on Wednesday. Since making a new high in early September, it has yet to break that high — forming first a bullish flag (pointed out several times), and now a “V” consolidation with resistance at 13,653.

Both formations are bullish, and so it is likely that this week we will see a break to new four-year highs. But if Europe goes awry or some other headline turns stocks negative, any pullback should be restricted to the 50-day moving average at 13,278 and the former breakout line at 13,275. The MACD internal indicator has turned up, is oversold, and is very close to flashing a buy signal.

DJT Chart
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Dow theorists breathed a sigh of relief on Wednesday when the Dow Jones Transportation Average reversed up from its support at the line drawn from the June 4 close to the September low close. The index has resistance at its 50-day moving average at 5,058, which is just above Friday’s close. Major resistance is at its 200-day moving average at 5,145, and a break there could result in a major market rally. And there was more good news: The MACD internal indicator flashed a buy signal on Friday.

 Nasdaq Chart
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The Nasdaq has been lagging the other indices but nevertheless has retained its bullish posture by holding above the breakout line at 3,122, which is currently its major support line. A break below that line could spell trouble since the intermediate support line is also at 3,122. MACD is oversold and is beginning to hook up. A break above the resistance zone at 3,184 to 3,197 would be a breakout event and would no doubt lead to much higher prices.

Conclusion: Despite the many uncertainties, both domestic and foreign, U.S. stocks made a good showing last week. The Dow industrials and other higher-quality, high-dividend stocks outperformed others, indicating that the big money is still optimistic but cautious.

The AAII sentiment numbers fell for both bullish and bearish sentiment, leaving the difference between optimism and pessimism very narrow. This marks the first time since late 1993 that the difference has been less than 1%. I believe that this, along with continued selling of equities by the public, is showing us that the public is so fearful that they are not willing to buy stocks. That is a super contra-indicator, telling us that institutional investors still control the market, and they are likely to continue to follow Fed money into equities. 

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[1].

For a list of this week’s economic reports due out, click here[2].

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