Market at Risk of a Sell-Off

by Sam Collins | January 7, 2013 7:31 am

On Friday, a handful of positive economic reports, along with the trailing impact of avoiding the fiscal cliff, resulted in a strong close for the week. For the S&P 500, Friday’s close was the highest since December 2007. And the Dow had its best week in more than a year.

The Labor Department said 155,000 jobs were added last month, slightly less than expected, and the unemployment rate was unchanged at 7.8%.  But U.S. non-manufacturing was surprisingly strong.

At Friday’s close, the Dow Jones Industrial Average was up 44 points to 13,435, the S&P 500 rose 7 points at 1,466, and the Nasdaq gained 1 point at 3,102. The NYSE traded 651 million shares and the Nasdaq crossed 380 million. On the Big Board, advancers led decliners by 2.75-to-1, and on the Nasdaq, advancers were ahead by 1.8-to-1.

Three charts show the wide differences between three types of indices:

Russell 2000 Chart
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Trade of the Day Chart Key

Last week, the Russell 2000 small-cap index blew through its prior top at 864.7 made in September for a new all-time high. But at a RSI reading of 74, it is very close to the September RSI high of 77, which preceded the fall from 864.7 to about 765. However, since the Russell made a new high and the RSI did not, a non-confirmation exists and that is a negative.

On a pullback, its immediate support is the September high, but it more likely could fall to the December high at 852. Subsequent support is at the 50-day moving average at 821 and the 200-day at 808.

SPX Chart
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The S&P 500 large-cap index is on the brink of a new high but hasn’t managed to surmount September’s high at 1,474.5, which is its next point of resistance. Unlike the Russell 2000, the RSI is not as overbought but is more overbought than normal and is in a non-confirmation status in that while price has exceeded the December high of 1,448, RSI is lower than the December peak. Its next support is the December high at 1,448, then its 50-day moving average at 1,412, and then the 200-day moving average at 1,391.

Nasdaq Chart
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Despite the gap up following the buy signal from our proprietary indicator, the Collins-Bollinger Reversal (CBR), the Nasdaq is struggling to hold its gains and is more susceptible to a pullback than the other indices.

It will most likely either totally close the open gap or fall to 3,052, which would close half of the opening. The first support is at 3,061, and then the series of moving averages at just under 3,000.

Conclusion: Stocks had a great week, but much of that was due to the big headline of the month, the avoidance of the fiscal cliff, along with new pension money that always supports the market at the beginning of the year. However, technically it was a great week for stocks with two days of back-to-back 10-to-1 up-volume days. According to Lowry Organization, the last time we saw that was January 1987, and it led to a 24.5% run to a peak in early April.

But can this explosion of buying be sustained? Longer term, absolutely, since Congress and the Fed have the ability to keep shoveling money into the system and Q4 earnings are expected to be strong. However, near term is questionable since Thursday’s and Friday’s volume shrank to the average volume of last year, and RSI non-confirmations exist on the Russell 2000 and S&P 500. This condition may be telling us that last week’s gap was an “exhaustion gap” and that traders could be at risk for a shallow sell-off and a close or partial close of open gaps.

With that in mind, keep an eye on the support areas of each chart — they represent entry points in what is becoming a highly volatile market.

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].

  1. click here:
  2. click here:

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