Stocks May Pull Back This Week; If So, Buy!

by Sam Collins | January 22, 2013 2:29 am

On Friday, stocks rallied after news that House Republicans were considering a plan to extend the federal borrowing limit by three months. And better-than-expected earnings from General Electric (NYSE:GE[1]) and Morgan Stanley (NYSE:MS[2]) helped the major indices close on a positive note.

At Friday’s close, the Dow Jones Industrial Average was up 54 points to 13,650, the S&P 500 gained 5 points at 1,386, and the Nasdaq fell 1 point to 3,135. The NYSE traded 1.1 billion shares and the Nasdaq crossed 513 million. On the Big Board, advancers were ahead of decliners by 1.8-to-1, and on the Nasdaq, advancers led by 1.2-to-1.

VIX Chart
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The CBOE Volatility Index (VIX) hit a five-year low on Friday, which means there was no fear in the market. This anomaly was probably due to the upcoming long weekend and January options expiration. February futures continued to fall as shorts ran for cover in fear of a bullish breakout in the equity markets.

SPX Chart
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The S&P 500 broke free from a massive inverted head-and-shoulders last week. This breakout has a near-term target of 1,500 and a long-term target of 1,589-plus (see Jan. 18 Daily Market Outlook[3]).

Even with the big break, the Relative Strength Index (RSI) is not as overbought as the March (73.15) or April (74.74) readings. But it is in the slightly overbought zone at 69.06.

DJI Chart
Click to EnlargeTrade of the Day Chart Key


The Dow industrials made a new closing high on Friday, exceeding the close at 13,610 in October. But a clean break is still pending since the intraday high made in September at 13,662 has yet to be topped.

The index will probably get another chance to take out that high this week since the intermediate bull channel that started in November has lots of momentum and the RSI is slightly overbought.

DJT Chart
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On Friday, the Dow transports plowed ahead to an all-time high. But RSI is now very overbought, and despite the power of this explosion of buying, nothing goes up forever. Be prepared for some profit-taking in this sector.

Conclusion: The stock market is running away from those who hesitated to jump aboard as it rallied to five-year highs on the S&P 500 while the Dow Jones Transportation Average broke to a new all-time high.

There will be pullbacks and some could come this week. But the U.S. stock market is in a very powerful bull market that will be difficult for the bears to reverse. Any weakness should be used as a buying opportunity for stocks in my favorite sectors: cloud computing stocks[4], financials and builders[5].

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. GE:
  2. MS:
  3. Daily Market Outlook:
  4. cloud computing stocks:
  5. financials and builders:
  6. click here:
  7. click here:

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