Market Dodged Death Cross, but Not for Long

by Sam Collins | December 18, 2012 2:12 am

On Monday, stocks had a broad advance as budget talks between the president and House speaker appeared to be making progress. President Obama and Rep. John Boehner had a 45-minute conversation, and Boehner proposed a tax-rate increase for the first time during the long struggle to resolve the income versus spending cuts issues.

At the close, the Dow Jones Industrial Average was up 100 points at 13,235, the S&P 500 gained 17 points to 1,430, and the Nasdaq rose 39 points at 3,011. The NYSE traded 700 million shares and the Nasdaq crossed 428 million. Advancers led decliners on the Big Board by 2-to-1, and on the Nasdaq, advancers were ahead by 2.2-to-1.

DJI Chart
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Trade of the Day Chart Key

Following a turn down from its intermediate bearish resistance line last Monday, the Dow Jones Industrial Average found support at its 50-day moving average (blue line) at 13,114. The next support rests at the 200-day moving average at 13,000. The overall long-term trend is up with the major bullish support line now just under 12,600. MACD is overbought.

DJT Chart
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Those who follow the Dow Theory will be interested in the current pattern on the Dow Jones Transportation Average. When the Dow industrials broke to a new high in October, the transports did not. This is called a Dow non-confirmation, which puts the overall direction of the market in question.

Even a break above the trendline at about 5,200 would not resolve the issue. At a minimum, the transports must break to a new high that exceeds the high of February 2012 at 5,425 for a confirmed uptrend to count. Purists might even consider February’s high to be insufficient and claim that the high of July 2011 at 5,628 must be broken in order to confirm an uptrend, but I’d be satisfied with February’s number.

Conclusion: Despite the headlines, stocks rallied Monday, avoiding two potential negatives — a turn down by the Dow transports and a break of the Dow industrials’ 50-day moving average line.

The other major negative that was dodged Monday is the death cross on the Nasdaq (see Monday’s Daily Market Outlook[1]). The Nasdaq’s 50-day moving average closed at 2,991.9, and its 200-day moving average closed at 2,989.03 — a spread of just 2.87 points now separates the two with the 50-day rapidly closing the gap.

Unless Apple (NASDAQ:AAPL) rallies or some other miracle occurs that has an immediate positive impact, there is little doubt that a death cross will occur on the Nasdaq and the impact on the market could result in a quick 5% to 8% pounding.

Could such a fall be avoided by news of an agreement that avoids the fiscal cliff? Of course. But “avoided” is probably the wrong word — delayed, in my opinion, is the more likely development.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

  1. see Monday’s Daily Market Outlook:
  2. click here:
  3. click here:

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