Investors Should Stay the Course This Week

by Sam Collins | October 14, 2013 7:40 am

On Friday, the Dow Jones Industrial Average rose triple digits, which resulted in the first weekly gain for the index in three weeks.

Stocks gained as investors anticipated that a deal would be struck this past weekend that would end the government shutdown and avoid a default by raising the debt limit. All 10 sectors of the S&P 500 closed with gains, with energy in the lead, up 1% despite a drop in the price of crude oil.

But U.S. consumers are less optimistic about the economy, according to the Thomson-Reuters/University of Michigan preliminary October numbers. The consumer sentiment index fell to 75.2 from 77.5 in September.

At Friday’s close, the Dow Jones Industrial Average gained 111 points at 15,237, the S&P 500 rose 11 points to 1,703, and the Nasdaq gained 31 points at 3,792. The NYSE traded 635 million shares and the Nasdaq crossed 422 million. Both major exchanges reported that advancers were ahead of decliners by 2.8-to-1.

For the week, the Dow gained 1.1%, the S&P 500 rose 0.8%, and the Nasdaq fell 0.4%.

SPX Chart
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Chart Key[1]

The S&P 500’s reversal on Thursday strengthened its technical picture by driving it back into the resistance (formerly support) zone at 1,676 to 1,710. By doing so, it preserved its intermediate trendline at just over 1,650.

MACD reinforces this view with an up-hook on its fast line, giving it the look of a pending buy signal. A buy signal would result from the fast line (red) crossing up and through the slow line (blue).

Nasdaq Chart
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The Nasdaq also reversed itself from a nasty break of its 50-day moving average, and its MACD indicator is oversold.

Conclusion: Even though Thursday’s reversals were the result of optimism over a possible break in negotiations on the nation’s debt limit and budget, they provided strong technical positives. The combined rallies of the major indices amounted to the strongest day of the year, and breadth was very positive — up volume beat down volume by 11-to-1 on the NYSE and 10-to-1 on the Nasdaq.

However, even though the technical picture appears to be telling us that a deal on the nation’s debt and budget is in the works, it doesn’t guarantee that it will happen. If negotiations break down and the nation defaults on its obligations on Thursday, no technical picture on Earth is going to stop the market from a deep correction.

Thus, our current strategy is to refrain from long-term purchases unless the price indicates that an oversold condition exists, sell bonds and bond funds, and accumulate cash for future bargain hunting.

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].

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