What to Watch
Over the past two weeks, the tone in the stock market has clearly improved as most of the major averages made their lows on November 16 when the last column was published. At the time, though I was confident a major top had not been completed, I could not rule out another wave of selling.
I also mentioned that V-Shaped bottoms were rare and though it is possible that one was completed on November 16 this has not been confirmed. The last such bottom occurred in March 2011 in reaction to the Japanese tsunami. The Spyder Trust (SPY) dropped 7% from late February through mid-March and by late April was making new highs. Then the first pullback in 2011 retraced 38.2% of the rally from the March lows so clearly the extent of the first real setback now will be important.
The individual investors have become much more positive as 40% are now bullish as opposed to just 28.6% on October 18. There has been little movement in the newsletter writer sentiment as just over 39% are bullish with the number of bears at 27%. This has shown little change in the past seven weeks.
The 2012 Performance chart shows that despite a brief drop in mid-November that the Spyder Trust is still doing the best, up over 13%. GLD is back below SPY but still well above the performance of TLT, which is up just close to 3%. As I noted last week the bond market pros are still bullish on bonds and bearish on stocks. It has been a rough year for crude oil prices.
The daily chart of the NYSE Composite shows that the 50% Fibonacci retracement support from the June lows was tested on November 16. The two-week rally has taken the NYSE composite back to chart resistance in the 8250-8300 area with more important resistance at 8400 (lines a and b).
The NYSE Advance/Decline line dropped slightly below its longer term uptrend, line d, before rebounding. The A/D line is now back to its early November highs but needs to move convincing above the resistance at line c, and make new highs to confirm that the uptrend has resumed.
The 20-day EMA represents first support at 8150 with more important chart support now at 8000.
The rally in the Spyder Trust (SPY)has taken it back to the band of strong resistance in the $142.50-$143 area, line a. The 50% Fibonacci retracement resistance at $141.44 was overcome last Monday with the more important 61.8% resistance at $143.02. The downtrend from the October highs, line e, is now at $144.50.
The rally in the S&P 500 A/D line has not been that impressive as while it shows a short-term pattern of higher lows, it is still below the strong resistance from November, line g. It was also a sign of weakness that the support for the A/D line going back to August, line h, was broken on the last decline.
The daily chart has initial support now at $140.50 and the rising 20-day EMA with further at $139.60. A daily close below $138 would be the first sign that the lows could be tested.
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