This Market Will Be a Delight for Traders, But …

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Friday’s rally was not only the best of the month, but the second consecutive weekly gain for the Dow Jones Industrial Average, the S&P 500 and the Nasdaq (barely). Only the Russell 2000 (small caps) closed lower on Jan. 22, but higher for last week.

The stats for the week:

  • Dow Jones Industrial Average: +2.2%
  • S&P 500: +1.8%
  • Nasdaq: +0.4%
  • Russell 2000: +1.4%

The Wall Street Journal quoted traders as attributing the Dow’s big surge on Friday to the Bank of Japan’s surprising move to join the European Central Bank in imposing a levy on customers to hold their money. For Europe, this has deflated the price of the euro, which has helped European exporters. But even so, Europe’s inflation rate is still near zero, indicating almost zero growth.

The modest gains by the Nasdaq were the result of weakness in biotechnology and big-cap technology stocks: Apple Inc. (AAPL), Amazon.com, Inc. (AMZN) and Qualcomm, Inc. (QCOM) were all weaker than expected due to missing earnings targets (AMZN) or to management’s cautious outlook (AAPL and QCOM).

While Europe is contracting despite the ECB’s easy money plan, in the U.S. consumer confidence rose in January as reported by the Commerce Department, which also said that gross domestic product expanded at a 0.7% annual rate in Q4. Analysts had expected an expansion rate of 0.85%.

Crude oil rose to a three-week high and has risen in six of the past seven sessions. West Texas Intermediate (March delivery) rose 40 cents to $33.62 per barrel, but lost 9.2% for the month. Skepticism regarding a cut in output between Russia and OPEC is expected to continue to cause high volatility in the energy patch.

At Friday’s close, the Dow Jones Industrial Average rose 397 points to 16,466, the S&P 500 gained 47 points at 1,940, the Nasdaq closed at 4,614, up 107, and the Russell 2000 rose 32 to close at 1,035. The NYSE’s primary exchange traded 1.6 billion shares with total volume of 5.3 billion shares, and the Nasdaq crossed 2.5 billion shares. On the Big Board, advancers outpaced decliners by 8-to-1, and on the Nasdaq, advancers led by 3.9-to-1.

Most important: Advancing volume exceeded declining volume by 11.6-to-1. Block trades on the NYSE increased to 6,871, up from 5,540 on Thursday.

For the month of January: The DJIA fell 5.5%, the S&P 500 lost 5.1%, the Nasdaq was off 7.9% and the Russell 2000 lost 8.8%.

Monday’s Outlook

S&P 500 17-month
Click to Enlarge

Chart Key

For the first time ever, the price line has crossed the 17-month moving average line three successive times, each rendering a different signal. Is this merely the result of extremely high volatility or a long-term head-and-shoulders top?

S&P 500 Bull
Click to Enlarge

Agreed, this is a very busy chart; however, please stick with me as I point out its major technical features, working from the bottom up.

MACD buy signals preceded each move up, the low close of last month is exactly 100 points higher than August’s low close, reversal closes (up) occurred on the high of the day on the first trading day in October and the last trading day in January, and finally, a death cross preceded each move down.

Conclusion

Each signal appears to confirm a huge sideways movement, which is the result of institutional trading (note the increases in blocks and advancing volume over declining volume on Friday at 11.6-to-1).

My interpretation of this chart and our 17-month moving average chart is that a huge trading rectangle has been established with support at about 16,000 and resistance at the 200-day moving average, now at 17,380.

This is a delight for high-volume traders but misery for long-term holders because unless these support and resistance lines are broken, the stock market will fail to break beyond those lines for the remainder of 2016.

Thus, these charts illustrate neither “bull survival” nor “scary similarity.” They illustrate a stock market that offers opportunity to traders who recognize and take advantage of the significant lines of support/resistance. They will be able to make lemonade from lemons.

Today’s Trading Landscape

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

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


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/this-market-will-be-a-delight-for-traders-but/.

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