Yesterday stocks fell from the impact of disappointing economic data, a handful of earnings reports that failed to meet expectations, and little progress toward a settlement of the Greek issue. But from the standpoint of technical analysis, the market has been predictably sluggish following the best January in 15 years for the S&P 500 and the best for the Dow Industrials since 1997.
At the close, the Dow Jones Industrial Average fell 21 points to 12,633, the S&P 500 lost under a point at 1,312, and the Nasdaq gained 2 points at 2,814. Volume on the NYSE increased to over 1 billion shares, while 501 million shares traded on the Nasdaq. On the Big Board, advancers outpaced decliners by 1.4-to-1, but advancers were just slightly ahead on the Nasdaq.
January was so strong that the monthly chart of the S&P 500 with its 17-month moving average has turned bullish again. The black line, which represents price, moved sharply away from the red moving average, and so the recent strength has been confirmed by the longer-term study.
�I don�t think that I have ever heard the financial media mention a �golden cross� on TV, and yet every talking head referred to it yesterday as if the formation was the guarantee of higher prices. Even The Wall Street Journal highlighted the signal in its �MarketBeat� section.
It is a favorable signal that our readers have seen me highlight in a number of charts. However, when everyone jumps aboard a technical indicator, no matter how sound, it makes me nervous.�
A golden cross is the intersection of the 200-day moving average by the 50-day moving average and is generally accepted as a �long-term validation of a rally.� But the only validation study of which I�m aware was that done by Birinyi Associates, and it is cited in The Journal article. According to Birinyi, stocks have averaged a 6.6% gain following 26 golden crosses that have occurred since 1962.�
Many commentators mentioned the golden cross but few reported that the S&P 500 had declined four successive days. In other words, there is a bullish bias that must be overcome by a nasty negative jolt before the market is purged of the weak holders. The trend has stalled at an obvious resistance line, but the six-week rally tracked at an unusually steep angle and must be �corrected.�
After the close yesterday, one of the institutional darlings, Amazon (NASDAQ:AMZN), posted a 57% drop in Q4 profits. And it warned that it could post an operating loss for Q1. The stock fell almost 10% in after-hours trading and could be the catalyst for a sell-off that will offer us the opportunity to hop back onto the bull for a second charge against the highs of April, June, and July.
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