Santa Rallied the Troops

Santa Claus came to Wall Street last week. Things started off slowly with a sharp sell-off Monday. The markets rallied for the remainder of the week. All major indexes had a four day win streak to conclude trading prior to the holiday. There was a greater than 3.5% gain in equities last week having more than offset the losses from the prior week.

Buyers came out aggressively in a risk on trade last Tuesday. Good news overnight from Europe set things in motion. European markets moved sharply higher on a better than expected debt auction in Spain. Greater demand and lower yields for Spanish debt reduced investor fears and led to a stampede. The move higher was the largest single-session move in over a month. 

The S&P 500 moved through its 50 day moving average last Tuesday. This move emboldened buyers for the rest of the week. Friday, the index closed above its 200 day moving average. This sets up the potential for a negative divergence. The divergence is negative because all of the other major indexes have not been able to close above their respective moving averages. The Dow is trading above its 200 day and is in fact the strongest of the major indexes. The NASDAQ and Russell Small Cap indexes need to close over their 200 day moving averages in order to signal a stronger market. 

I gave short term resistance and support levels for the major indexes last week. The support levels were tested last Monday and then the resistance levels were breached on Tuesday. The fact that both support and resistance levels are tested in such a short period of time is a clear indication of the volatility that remains in the market. 

The moves last week left the long term technical picture of the market in a neutral position. 54% of the stocks in the S&P 500 are in strong shape technically, either basing or advancing. That reading showed a significant improvement last week. With a slightly better than coin flips chance of picking a winner, stock selection is critical. Several areas of the market are performing fantastically. On the other hand, several stocks look like the rally off the 2009 lows never took place. The tape remains split. Many stocks remain in their own private bear markets. Several areas of the market are seeing consistent new highs. The utility, staple and consumer discretionary sectors continue to lead the market.

Short term support levels for the S&P 500, Dow and NASDAQ are 1200/11,730/2515. Near term resistance comes in at 1270/12,300/2676.