The Bull Has 3 Days to Prove Itself

by Sam Collins | January 14, 2013 2:31 am

On Friday, stocks opened modestly lower on news that China’s consumer price index rose 2.5%. This rise in inflation to a seven-month high led economists to conclude that further stimulus from the Chinese central bank was unlikely. But stocks recovered from the early losses, despite a U.S. trade gap that increased in November, and the S&P 500 held onto its five-year closing high.

At the close, the Dow Jones Industrial Average gained 17 points at 13,488, the S&P 500 was breakeven at 1,472, and the Nasdaq rose 4 points to 3,126. The NYSE traded 633 million shares and the Nasdaq crossed 353 million. Advancers and decliners were almost even on both major exchanges.

Dow Chart
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Trade of the Day Chart Key

Last week, the big blue-chip Dow slugged to a new high for the current run from the November low. But it was tough going even as it successfully tested the near-term resistance (now support) line at about 13,330. Nevertheless, with MACD positive and the 50-day moving average turning up from the 200-day moving average, the trend belongs to the bulls.

Nasdaq Chart
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The strongest bullish feature of the Nasdaq’s chart is the deep “V” reversal off of the November low — a very reliable pattern that eventually should lead to a new high. But it could take some time to work through the various levels of resistance: first, last week’s highs at 3,127-3,128, then the March high at 3,134, the October high at 3,171, and finally, the September high at 3,197. Support is initially at last Tuesday’s low at 3,076, and MACD is bullish.

SPX Chart
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Although it appears that the S&P 500 has broken its inverse head-and-shoulders neckline (1,466), in order to confirm the break it must exceed the September high at 1,474.5. Thus far, momentum and the MACD are supportive, but at this critical point more volume and positive breadth would be welcome.

Conclusion: After the big pop on Jan. 2, the advance has slowed to a crawl. After such a high-volume rush to buy that formed gaps in most charts and was backed by two 10-to-1 up volume days, a consolidation is not unusual. But most technicians look for a strong positive follow-through within 5 to 10 trading days. Friday was the seventh day. C’mon, el toro, this is no time for a nap.

On Friday, I provided ETF charts for two of my three favorite sectors[1] of the year. They were the Financial Select Sector SPDR (NYSE:XLF) and the iShares Dow Jones US Home Construction ETF (NYSE:ITB). The third sector is actually a sub-sector, and I chose its chart for the Trade of the Day[2].

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. I provided ETF charts for two of my three favorite sectors:
  2. Trade of the Day:
  3. click here:
  4. click here:

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