Cautious Bulls Should Wait for the Next Buy Signal

by Sam Collins | January 21, 2014 2:16 am

On Friday, the stocks of the Dow Jones Industrial Average seemed to be the only ones attracting buyers prior to the three-day holiday weekend. The broad market ended lower as disappointing earnings and lower guidance from some industry heavyweights drove the S&P 500 and Nasdaq from recently achieved highs.

American Express (AXP[1]), Visa (V[2]), IBM (IBM[3]) and Goldman Sachs (GS[4]) led the blue-chip index to a 0.3% gain. The was made in spite of Intel’s (INTC[5]) earnings miss and General Electric’s (GE[6]) profit margin miss. GE’s management said things were improving, albeit in a mixed environment.

Banks continued showing better-than-expected profits. Morgan Stanley (MS[7]) rose 4.4% after beating expectations. According to FactSet, of the 53 companies in the S&P 500 that have reported so far, 57% have topped analysts’ average earnings estimate. However, many are beating lowered expectations, and 96 companies have warned that fourth-quarter results would be worse than Wall Street projected, compared to just 15 projecting better-than-expected results.

At Friday’s close, the Dow Jones Industrial Average rose 42 points to 16,459, the S&P 500 fell 7 points to 1,839, and the Nasdaq was off 21 points at 4,198. The NYSE’s primary market traded 13.5 million shares with total volume of 3.6 billion shares, and the Nasdaq’s volume totaled 2.2 billion shares. The increased volume was due to options expiration. Decliners outpaced advancers on both exchanges by 1.4-to-1.

For the week, the Dow gained 0.1%, the S&P 500 fell 0.2%, and the Nasdaq rose 0.6%.

SPX Chart
Click to Enlarge

Chart Key[8]

The S&P 500 made a marginal new high last week after bouncing from 1,815, which is just 2 points from the top of the important support zone at 1,775 to 1,813. But the past three days have been down, which forms resistance and thus decreases the likelihood of another breakout.

However, if the S&P 500 can muster a successful charge against the high at 1,850, its target would be 1,887 (1,850 – 1,813 = 37 added to 1,850 = 1,887).

Dow Chart
Click to Enlarge

December’s breakout was followed by a consolidation called a “flag,” which may have found a bottom just above the support band at 15,720 to 16,100. This is technically positive. But, like the S&P 500, it has important overhead resistance to overcome and a negative MACD.

Conclusion: The charts of the S&P 500 and Nasdaq are technically positive. And while MACD is negative, the other internal indicators (momentum, stochastic, RSI) are positive.

Despite the flat trading that ended the first 13 days of the new year, the overall condition of the market is still bullish. But in order to sustain December’s momentum, stocks will have to attract more upside volume. As cautious bulls we will continue to wait for the next signal to buy.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[9].

For a list of this week’s economic reports due out, click here[10].

  1. AXP:
  2. V:
  3. IBM:
  4. GS:
  5. INTC:
  6. GE:
  7. MS:
  8. [Image]:
  9. click here:
  10. click here:

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