Thursday, November 1, 2012

2 Dangerous Numbers to Watch

The stock market turned positive just after noon yesterday, led by a reactive bounce from commodities and a group of defensive sectors: health care, utilities, consumer staples and consumer discretionary. Since the focus of yesterday�s rally was on defensive groups and a rebound of an oversold sector, does this mean that the broad advance is over?

The long-term and intermediate-term trends are intact — just the short-term trend is now in doubt following the clobbering of the many futures-related industries. And for a concise view of the situation I�ve included two important charts: the S&P 500 Index and the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP).

Until now, we�ve been focusing on the overall bullish implications of the S&P 500�s drive to new highs and the major support areas. However, near-term traders will want to watch an important and somewhat obscure trendline that could determine the future of stocks for the next couple of weeks.

That line is drawn from the March high of 1,332 and connects with yesterday�s intraday low — also at 1,332. Perhaps not so coincidentally, the intermediate trendline (heavy red dashes) is rising rapidly and will intersect the price line today at — you guessed it — 1,332. In other words, a close under that number will most likely lead to a stalled market and a test of other support zones of the S&P 500.

The other chart of near-term significance is that of the U.S. dollar ETF UUP. The fund has popped above the bearish resistance line drawn from the January to April highs. This raises the yellow flag of caution — a shift in trend could be developing for the dollar. Increasing upside volume supports the move higher. And a move higher by the dollar would most likely result in another round of selling in energy and other commodities and related stocks. However, yesterday�s reversal down after a slight penetration of the chart�s 50-day moving average at 21.59 is a plus for stock market bulls.�

Conclusion: Traders will want to keep an eye on two numbers: the S&P 500�s 1,332 line and the 50-day moving average of UUP. A joint close under these lines could lead to a quick test of other major support zones.

For one stock to buy now, see the Trade of the Day.

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