Although the S&P 500 gained a whopping 7.4% for the week, Friday closed mixed. The lack of follow-through after the early gains provided more evidence that it is economic news from Europe and China that is moving the markets and not U.S. developments.
Friday started higher following a report that U.S. unemployment had fallen to 8.6% from 9% in October. But the report also showed that a record number of workers have dropped out of the work force and are not counted as part of the unemployed.
And later in the day gains were reversed upon reports that Republicans in Congress might try to impede the IMF from assisting with European bailouts.
The Dow Jones Industrial Average fell 0.01%, the S&P 500 was off 0.02%, and the Nasdaq gained 0.03%. Volume on the Big Board totaled 871 million shares and 423 million shares traded on the Nasdaq. Advancers exceeded decliners by about 1.5-to-1 on both exchanges.
Following four strong days for stocks, it is clear what technical barriers must be overcome in order for the bulls to keep the market in an upswing. There are three primary resistance points that must be overcome: First is the 200-day moving average and the bearish resistance line, which intersect at 1,265. Then the November high at 1,278, and finally, the October four-month high at 1,292. Initial support lies at the 1,220 line. Note that the stochastic is on a buy signal, but the chart action itself trumps the internal indicator and currently the advance may have stalled.
Note the small key-reversal day that has been overlooked by many technicians. A key-reversal day may appear to be a minor negative. But when it appears on multiple charts, it shouldn’t be ignored. It occurs when a stock or an index opens higher, then moves to a new high in a trend but closes lower. It is a sign of overall weakness and is usually followed by more selling.
As noted last week, the key to the success of the market’s rally is the U.S. dollar. On Friday, despite optimistic comments from Europe that the major powers have the ability to deal with their debt crisis, the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) rose, moving away from its first support at the 50-day moving average at $21.91. The inverse relationship of the dollar to market moves tells us that it could be rough going this week for the euro and U.S. markets, and options may be your best bet for making money.
Conclusion: U.S. stocks moved higher last week on high expectations of a solid European plan that provides for both stability and growth. But the blast-off could be a fizzle.
Sarkozy of France and Merkel of Germany meet today, but they lack the authority and power to solve the problem since all 17 members, not just two, need to approve a detailed agreement. And French politicians from both the left and right were very vocal this weekend against cooperation with Germany.
Reports of a slowdown in China dropped the Shanghai Composite Index 1.1% on Friday. And The Wall Street Journal reports that “Vladimir Putin’s party appeared headed for a major setback in parliamentary elections Sunday.” This unexpected result would favor Russia’s Communist Party, and in Egypt Islamists have won a majority.
Stocks usually fall during periods of uncertainty, and so it is difficult to imagine that a major rally can be sustained under such chaotic international situations.
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