Trend Is Up, Funds Looking To Reload. But Also Consider This...

Volatility contracted on Friday, as the SPX ($SPX.X | Quote | Chart | News | PowerRating) and Dow ($INDU | Quote | Chart | News | PowerRating) formed a triangle from 9:30 a.m. to 1:00 p.m. ET, and then the SPX breakout above 1188.50 carried to just 1191.45, which was the intraday high. The program push to new rally highs for the SPX on a quiet Friday didn't materialize as the 1191 magnet proved to be the key number again, and the SPX closed at 1188, -0.1% on the day. The daily range was narrow at 6.2 points. The Dow lost 10 points to 10,543, the Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) just 1 to 2128, with the (QQQQ | Quote | Chart | News | PowerRating) -0.3% to 39.93.

NYSE volume backed off to 1.44 billion shares, with the volume ratio neutral at 47 and breadth +366.

The XBD was the only primary sector to finish green at +1.0%, trading to new highs for this rally and leading the SPX, which can be a good thing.

The best part of last week's market action is that there was only a small decline to the 1173.76 intraday low on Thursday, but then closed at 1189.24, followed by 1188 on Friday vs. the week's high of 1192.41. In four of the last five days, the SPX had highs between 1192.41 and 1190.51, with the high close in the current rally being 1191.37 on 12/01. I expect this resistance to get taken out before year-end. This week has several time dates, so there should be some trading-range volatility.

Last week's action is well-expressed by the five-day RSI numbers. Gold sold off with the XAU 5 RSI at 17.3 and the sharpest down was the CRB index at 11. The (SMH | Quote | Chart | News | PowerRating) was the third weakest at 28.9, and they were the only three from my overall composite with five-day RSIs below 30. On the strong side, it was led by the XBD (brokers) with the 5 RSI at 77.2 and the only sector or index >70. The major indices, including the (IWM | Quote | Chart | News | PowerRating), had five-day RSIs between 57 (SPX) and 52.3 (IWM). This, of course, was due to the trading-range activity (or lack of).

The bias at year-end is certainly up as all trends in the major indices and 90% of the primary sectors are very strongly up, relative to positioning of price and the 8-, 20-, 50- and 200-day EMAs.

There are many hedge funds continuing to look for a dip here to reload for some kind of percentage move into year-end. Unless that dip happens this week, the 1190 - 1195 high zone is clearly the path of least resistance, and the Generals will have their way into year-end. The brokers seem to be making an early move out of their range to new highs.

Today's Action

The (SPY | Quote | Chart | News | PowerRating) closed at 119.33, which is the previous high close of the rally off the October 2002 lows. The (DIA | Quote | Chart | News | PowerRating) closed at 105.50 with a similar high close at 105.84, so there is no question where the SPX and Dow have to go for new levels. Based on the 1061 and 1090 retracement levels, the first downside retracements are the 1172, 1165 and 1160 levels. Thursday's attempt on the downside bounced off the 1173.76 low to close at 1189.24, so the bears failed to gain any traction.

Markets are perverse and many still expect some more downward pressure, probably this week, so my guess, if it does occur during this week's time zone, is that it will be no more than 2.0% - 3.0%, which is down to the 1161 .50 retracement level (if at all).

This is being done Sunday night for Monday.

Have a good trading day,

Kevin Haggerty