Smart Money Decides Prices Are Too Good to Pass Up

by Sam Collins | February 10, 2014 7:30 am

Despite a jobs report that fell short of expectations on Friday, stocks scored a solid advance with the Dow industrials closing out a shaky week with consecutive triple-digit gains.

Only 113,000 jobs were added in January, which was far below the consensus estimate of 185,000. Shortly after the announcement stocks fell, but within a few minutes the markets reversed and advanced for the remainder of the session with most of the indices scoring their second biggest advance of the year.

Treasury bonds also traded higher, and strangely, gold futures rose 0.5%. But the U.S. Dollar Index fell 0.25, which made little sense in light of the stock market’s advance and traders’ seeming optimism.

At Friday’s close, the Dow Jones Industrial Average was up 166 points to 15,794, the S&P 500 gained 24 points at 1,797, and the Nasdaq jumped 69 points to 4,126. The NYSE primary market traded 11 million shares with total volume of 3.7 billion shares, and the Nasdaq traded total volume of 2 billion shares. Advancers were ahead of decliners by 3.4-to-1 on the Big Board and 2.2-to-1 on the Nasdaq.

For the week, the Dow gained 0.6%, the S&P 500 rose 0.8%, and the Nasdaq was up 0.5%.

SPX Chart
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Chart Key[1]

A remarkable two-day rally that began on Thursday has popped the S&P 500 above the often mentioned support line at 1,775. This unusual turn is supported by a stronger MACD indicator. The next resistance is at the 50-day moving average at 1,809, and less important resistance is at the 20-day moving average at 1,804.

Dow Chart
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Like the S&P 500, the Dow Jones Industrial Average reversed its near-term downward thrust with a two-day reversal. The upswing for the Dow occurred just below its 200-day moving average, now at 15,483, and terminated at close to the high of the day, which was 15,799. Following a two-day jump, the Dow now rests within the supporting bands of 15,720 and 16,120. Its MACD is hooking up.

Conclusion: Last week’s two-day reversal, which pushed the major indices to gains for the week, appears to have institutional support. Volume increased markedly on both Thursday and Friday, and block trading increased as well. Apparently the big boys decided that one of the worse starts to a new year produced prices that were just too juicy to be ignored.

Just before this occurred, the public, as reported by the American Association of Individual Investors (AAII), increased their bearish sentiment from 21.49% on Jan. 16 to 36.41% on Feb. 6. Their bullish sentiment numbers during the same time frame fell from 38.99% to 27.9%. This is bullish since the public is usually wrong.

To my surprise, the rally picked up speed following a horrible jobs report. Go figure! As a result of last week’s unusual price action, the S&P 500 has established a support zone of 1,730 to 1,775. This zone should support any near-term profit-taking.

If the S&P 500 can maintain the torrid pace of late last week and close above its 50-day moving average line at 1,809, we could see an attack on the highs. But don’t count on it. I’m more inclined to believe that the rally will fail but that a tradable base has been formed above support zone. It is at this base that the big money is willing to make commitments, and so should we.

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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