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Could the Transports Usher in a Santa Rally?

If the laggard index can pop through its intermediate trendline, it has a chance at changing the trend

By Sam Collins, InvestorPlace Chief Technical Analyst

Stocks opened modestly higher Thursday on what was interpreted as a positive comment on the fiscal cliff negotiations by House Speaker John Boehner. But the speaker amended his comments, and the Dow fell about 50 points in five minutes. Then Senate Majority Leader Harry Reid responded that he thought the negotiations could end favorably by year end, and stocks rose to their former level.

Pending home sales for October rose 5.2%, and initial claims for unemployment benefits fell slightly more than expected last week.

At Thursday’s close, the Dow Jones Industrial Average was up 37 points to 13,022, the S&P 500 rose 6 points to 1,416, and the Nasdaq gained 20 points to 3,012. The NYSE traded 680 million shares and the Nasdaq crossed 393 million. Advancers exceeded decliners on both exchanges by about 2.5-to-1.

DJI Chart
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Trade of the Day Chart Key

The Dow’s break, slight as it may be, through its 200-day moving average may be the catalyst for a move higher. But the next line of sellers is just above Thursday’s close at the former breakdown line at 13,040. A close above the line should lead to a test of the 50-day moving average at 13,309 and falling. MACD is still on a buy signal.

DJT Chart
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Even the so-far boring Dow Jones Transportation Average is showing signs of life. On Thursday, it popped through its 200-day moving average and threatens to attack its intermediate trendline at about 5,175. Its MACD is also on a buy signal.

Conclusion: Despite the fiscal cliff and crises around the globe, stock buyers seem to be shaking off the uncertainty and are pushing the major indices higher. Most important from a technical point of view is the current strength in the Dow Jones Transportation Average. If the laggard index can pop through its intermediate trendline and establish a high at about 5,250, it could have a chance at changing its intermediate trend. However, the industrials will have to close above its 50-day moving average, as well as the resistance just above it, for a major move to develop.

We can dream of a Santa Rally, but so far that’s all it is, just a dream. Hmmm, do I hear a clatter on the roof?

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.

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