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SPX Could Hit New Reaction Highs if Fiscal Cliff Is Resolved


How do you play this potential scenario? Check out triple-play companies like DigitalGlobe, Qualcomm, and DaVita.

Regrettably, the five-day rally has left the McClellan Oscillator back in overbought territory, causing many market mavens to opine that all we have seen is a throwback rally with more downside to come. While it is hazardous to ascribe much meaning to market movements during holiday-shortened weeks, the fact that the SPX has vaulted above my 1390 "energy level," as well as travel back above its 200-day moving average at 1383.24, should be viewed as constructive. That's why last Wednesday I wrote:

The 1390 level on the SPX has proven time and again to be a key 'energy level,' both on the downside and now on the upside for the markets, as can be seen in the attendant chart. Moreover, as seen in the shaded levels in said chart, ALL of the recent tradable rallies have begun with a 'long-tailed' green upside candlestick chart formation. That 'green candlestick' upside move occurred [last] Monday (Dow (INDEXDJX:.DJI) +207-points), after Friday's upside reversal for the SPX, on heavy volume, potentially signaling the fabled year-end rally is near. Moreover, all recent rallies have come when the Dollar Index has been near a peak, as it is now near last January's peak of 81, followed by dollar's subsequent decline. So, while the media is rampant with 'fiscal cliff' worries, I think the year-end rally is near, or has actually begun. At worst, I believe last Friday's intraday "low" (1343 basis the SPX) and should be traded against as a failsafe point looking for higher prices. While that level may yet be retested, I think it will hold into the New Year.

Obviously I still feel that way, and would note that even though it took longer than it should, the recent undercut low chart pattern often referenced in these reports has gained more credibility given last week's surge. The trick from here will be to rally above the 1420-1430 zone that was a support level on the way down and now becomes an overhead resistance area. The current short-term overbought condition implies the SPX probably won't make it through on its first try, but if the "fiscal cliff" looks as if it will be resolved I think the SPX will make new reaction highs.

As for how to play this potential scenario, a few of the triple plays (beat earnings and revenue estimates and guided forward earnings estimates up) that occurred while I was away, and are favorably rated by our fundamental analysts with concurrent attractive chart patterns, include: DigitalGlobe (NYSE:DGI); Extra Space Storage (NYSE:EXR); FleetCor (NYSE:FLT); and Qualcomm (NASDAQ:QCOM). Other special situations that play to some of my themes are: Alere (NYSE:ALR); Covanta (NYSE:CVA); DaVita (NYSE:DVA); Kansas City Southern (NYSE:KSU); and Rayonier (NYSE:RYN).

The call for this week: All of the recent tradable rallies have begun with a "long-tailed" green upside candlestick chart formation (see shaded areas in chart below).

Click to enlarge

That "green candlestick" upside move occurred last Monday (INDU +207-points) following the previous session's upside reversal on heavy volume, potentially signaling the fabled year-end rally is near. That view is supported by the upside breakaway "gap" seen in the ProShares Ultra S&P 500 ETF (NYSEARCA:SSO) (see the chart below). But, this morning it looks like the overbought condition will take center stage, at least early, with the pre-opening futures down about 7 points as I write this.

Click to enlarge
No positions in stocks mentioned.
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