OVERBOUGHT MARKET STARTS TO LOSE UPSIDE MOMENTUM -- THE DOW MAY RETEST SUMMER HIGHS -- THE VIX IS BOUNCING OFF CHART SUPPORT WHICH IS ANOTHER SHORT-TERM CONCERN -- MONEY MANAGERS MAY BE TAKING PROFITS A LITTLE EARLY THIS YEAR
OVERBOUGHT DOW MAY BE STARTING SHORT-TERM CORRECTION ... Given the extent of the market rally since October, it's no surprise that it has reached an overbought condition. Chart 1, for example, plots the Dow Industrials. The 14-day RSI line (top of chart) is backing off from the 70 level for the first time since mid-September. The daily MACD lines (below chart) are also turning negative for the first time in two months. That suggests loss of upside momentum and the likelihood for some yearend profit-taking. The chart also shows the Dow threatening to fall below its (green) 20-day average. That would be another sign of a setback. The flat line drawn over the August/September highs should, however, act as a floor beneath the Dow. The market would have to fall substantially below that line signal a deeper correction. That doesn't seem likely given the positive seasonal trends that usually take place during the second half of December (the Santa Claus rally).
(click to view a live version of this chart)
Chart 1
S&P ALSO LOSES UPSIDE MOMENTUM... Loss of upside momentum is also seen in the S&P 500. The black line on top of Chart 2 plots the 12 day Rate of Change (ROC) which is a short-term momentum oscillator. The lower peak formed during November (falling red line) hasn't kept pace with the price move into new highs. A drop below the zero line would be a short-term negative. Initial chart support for the SPX is its mid-November intra-day low at 1777. Even more substantial support is likely at its early November low 1752, which also represents a 38% retracement of the October/November rally. That would also put the SPX in the vicinity of its 50-day average (blue line). The most critical chart support on Chart 2 is the mid-September peak. That also represents a 50% retracement of the recent upleg. Prices have to stay above that line to keep the 2013 uptrend intact.
(click to view a live version of this chart)
Chart 2
VIX IS BOUNCING OFF SUPPORT... Another cause for concern is that the CBOE Volatility (VIX) Index is bouncing off support. The red bars in Chart 3 show that each time the VIX has bounced off chart support below 13 since May, the S&P 500 has suffered a short-term setback (see arrows). Today's 6% jump in the VIX has pushed it to the highest level since mid-October. That suggests that short-term traders are looking to protect their 2013 gains. Seasonal trends usually favor a strong finish to the month of December. Seasonally, the best times to take profit in the new year are usually January and April. With such big gains on the books for 2013, however, it appears that money managers are starting to take some money off the table a little earlier than usual this year.
