How the Market Finished the Year
How will its components adjust to the new year?
Stocks: For all of the complaining I've been doing about the low-volume advance by equities during the month of December, we saw an equally perplexing low-volume sell-off during the last 40 minutes of trading on Thursday afternoon. I would be remiss if I didn't point out that both the Dow and the NASDAQ failed to hold their potentially very bullish monthly breakouts (10,507 and 2271.48, respectively).
Bonds: Bond prices spiked lower (and below support) sending rates higher Thursday morning. However, they rebounded sharply (back above support) in the afternoon as money rotated out of equities and into bonds quickly despite the thin pre-holiday trading.
Commodities: Like stocks, commodities saw a downside reversal Thursday afternoon on light volume. We'll have to wait and see what the new week and month bring in terms of direction for both stocks and commodities as we have little confidence in reading too much into any of December's action.
US Dollar: The US Dollar Index opened flat, traded sharply lower, but then rebounded to finish modestly higher Thursday -- again the thin trading ranks likely had the effect of increased volatility Thursday.
This morning: Stocks and commodities are sharply higher on dollar weakness as the DXY is below its closing support level of 77.47 (as of this writing). The yield on the benchmark 10-year Treasury remains above 3.80% as the market favors risk assets on hopes/expectations of better economic growth.
Market Internals: NYSE
Critical Market Components (with ETF proxies):
S&P 500 (SPY): fell back below its recent breakout (of rectangle consolidation) point of 1119; more substantial support comes in at the 75-day moving average of 1084.66; the next meaningful resistance above 1119 is 1139 -- which is a convergence of Fibonacci levels. The SPY actually held above its breakout point of 110.42 to 110.92.
NASDAQ (QQQQ): failed to hold its breakout as it closed below 2271.48 Thursday. The next minor level of support is the recent breakout point at 2212.49. As mentioned last week, the 2292 level is additional resistance provided by the 61.8% Fibonacci retracement of the 2007-2009 bear market.
Dow Jones Industrials (DIA): also gave back its potential monthly breakout of 10,507 and even closed Thursday below the next lower support at 10,450. Below 10,450, the next support level is the 60-day moving average at 10,210.34. Above the 10,507 resistance, the Dow has minor resistance at 10,580.03 (the December high). The 60-day moving average support on the Dow corresponds with 101.63 on the DIA.
10-Year US Treasury Yield (TLT): resistance for rates on the 10-year Treasury remains the 3.8% to 3.9% range and support is still down at the 3.6% level. There's a tug-of-war between the forces of potential inflation (pushing rates higher) and those of the "safety trade" (pulling rates lower) when money flows out of stocks and commodities. These levels translate to support for TLT at 89 and resistance at just below 92.
Commodity ETF (DBC): look for something to give in the recent battle for directional leadership between strong oil and weak gold. The DBC remains slightly below important resistance at the $25 level. Support for DBC comes in at 24 initially with more substantial support at 23.50.
US Dollar Index (UUP): short-term support (previous resistance) of 77.47 was tested Thursday and held nicely. With that action, the DXY remains right between that support level and resistance at 78.44. This trading range translates to 22.80 as support and 23.20 as resistance for UUP -- the ETF proxy for a rising dollar. If the DXY breaks out to the upside above 78.44, the next significant resistance would be the 81 to 83 area.
Semiconductor Index (SMH): no change to support and resistance for the SOX after Thursday's action; the upside resistance is at 366.52 (Fibonacci projection) with a max upside of 384.28 (bottom of first wave lower from July 21, 2006); horizontal line support exists at 332.11. These levels translate to 28.43 as resistance and 27.50 and 26.50 as resistance for the SMH exchange-traded fund.
Bank Index (KBE): no change to the technical condition; critical support at 41.62; staunch resistance at 44.82. The banks lagged badly from October to December after leading the charge higher earlier in 2009. What will 2010 bring for the banks?
Crude Oil (USO): crude still has important resistance at $80 with support down at 78.35. Both crude oil and gold (discussed below) will continue to be heavily influenced by the movements in the US Dollar going forward. USO support comes in around 38.25 while resistance is close by just above Thursday's high at 39.50.
Gold (GLD): gold now has its 50-day moving average and the underbelly of the broken previous uptrend line at 1117 and 1120, respectively, as resistance. Support for the yellow metal comes in at 1075 in the short-term with 1045 as our ultimate target (for new buys) below that. GLD's buy point would be around the 105 level while its resistance comes in at 109.30 to 110.
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