While progress has seemingly been made on the fiscal cliff negotiations, the urgency grows as 2013 approaches.
First off, we hope everyone had a great Thanksgiving weekend with friends and family. Some pundits are saying last week's rally was a "conspiracy" rally aimed to get spenders out for the holidays. If that’s the case, market timers had a lot to be thankful for after the outside day (Red Dog Reversal) on Friday, November 16 revealed the market's intentions for potentially higher prices.
Last week played out very well from a technical stand point. On the previous Friday, we had the outside reversal, which marks a potential direction change. On Monday, we got the potent upside follow-through that shows demand for stocks at higher prices. On Tuesday and Wednesday, we digested higher above the 200-day moving average, showing commitment to that level. Then on Friday, we got nice upside continuation.
Last week's action was enough for IBD to put us back in a confirmed uptrend. Typically when this happens, it means the market just had a nice move and could use a rest, so the subsequent day’s are very important. Although this new fledgling rally doesn’t always lead to a major bull run, it's a key first ingredient.
Last week, I went back to a more portfolio approach as I saw some nice relative strength and chart patterns that warranted more longs. Some strong stocks that showed relative strength during the market corrective process were my focus. I also think putting on an overlaying hedge and then adding to it into extensions like we saw on Friday will help deal with some overbought softness like we are seeing this morning.
Futures are down 4-6 handles and I do think we need to do some work above 1396-1403. We are above the 200-day moving average, but below the 50-day moving average. The next obstacle for the bulls will be to reclaim that 1422-1427 area but it could take a bit of time.
I know we still have to deal with Europe and Greece's third attempt at free money. While progress has seemingly been made on the fiscal cliff negotiations, the urgency grows as we head toward the New Year.
If this market wants to keep this new fledgling rally intact, we should not close below S&P 1386-1391 in coming sessions.
Scott Redler is long AAPL, BAC, SLV, QCOM, SBUX, FB. Short SPY.