A Crucial Level Is Percolating

 | Jan 22, 2014 | 6:00 AM EST
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Tuesday saw yet another flip-flop market session: On Friday the Dow was green by just over 40 points, and on Tuesday it was red by a similar amount. Yet, on Friday, I didn't hear anyone on television excusing that move by pointing out Visa's (V) rally, even though that was the case. On the other hand, if IBM's (IBM) after-hours decline extends into Wednesday, you can be sure we'll hear that the Dow is being dragged down by that one stock. In my view, this a ridiculous view to have: It is rationalizing an indicator.

The Nasdaq's flip-flop was similar, with a loss of more than 20 points Friday and a 28-point climb Tuesday.

But let's look at the chart of the Dow, since it has lagged the most year to date out of the major indices. Notice the downtrend on the chart. The Dow has touched and been repelled by that line almost every day of the year, with the exception of a few sessions early last week, when we actually saw the market decline.

At this point, only a move above 16,500 would change the Dow's chart into one that is no longer in a correction. Let's see how much IBM's action drags on this ancient index Wednesday.

Let's look at the S&P 500, as well. As you can see, the index is showing a very flat resistance line at 1850. If it isn't fully obvious to all, it will be within a matter of days as the S&P continues milling around under it -- and the more obvious it is, the more important it will become.

Specifically, if the S&P continues failing at this level, shorts are likely to grow bolder. The bolder they get, the more likely it is that a short-covering rally will ensue if the S&P broaches that area.

As you can see, the two big-cap indices and their resistance levels are becoming quite noticeable. How long will it be before we hear that 1850 is a big level? If the S&P doesn't get past it by the end of the week, I believe it will become a new mantra for the market.

In the meantime, breadth continues to perform well, and that means the McClellan Summation Index has continued rising. The big-cap indices might be stuck in the mud, and the number of stocks at new highs continues to contract, and sentiment remains too complacent. But, despite all this, the average stock is creeping upward for now. By my estimation, in order for the McClellan Summation Index to halt its rise, we would need to see a down day similar to last week's 1% decline.


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volatility is quite low here, and we could see some downsides here in the short term. ...



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