Raising the Caution Level

 | Nov 27, 2012 | 5:00 PM EST  | Comments
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The selloff into the Nov. 16 low wasn't random. The S&P 500 bottomed near another Fibonacci level, the .618 retracement of the rally off the June lows. The exact Fibonacci level was 1346.11. The low on Nov. 16 was less than 3 points lower at 1343.35. And that was that.

S&P 500
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From there, the SPX has now rebounded a pretty serious 66 points to the 1409 level. The high last Friday was 1409.15. Then came Monday's gap-down opening and a pullback to the 1398 level. Then back up to the same level that stalled prices last Friday. In fact, it's noteworthy that this morning, the early high in the SPX was 1408.62, then we had another pullback to the 1400 level and a pop back up to a slightly higher high of 1409.01. It's now backing off again.

For the moment, the case can be made that a short-term double top is forming at the 1409 level. That's a double top with Friday's high. There is another reason to expect some stalling at that level. The drop into the recent multi-month lows carried 131.16 points. The 50% retracement of that move comes in at 1408.93. So far, the SPX has stalled at 1409.15, then 1408.62 and then at 1409.01. That's three moves up to the 1409 level, with each move topping out less than one-third of a point from the 50% retracement of the recent decline from the September highs. That suggests trouble in this area.

For several reasons, not the least of which was the end of a favorable seasonal pattern after Thanksgiving, I did some selling of my Dow positions at last Friday's abbreviated session close. That day, the Dow closed at the 13,010 level, and, for now, that looks like a pretty good spot to have taken some chips off the table. My mutual fund accounts at Rydex are now invested up to a maximum of 50% levels. More conservative accounts are just 25%-35% invested.

S&P 500 Short-Term
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There are some bright spots, however, that still point somewhat higher. Note that while the S&P 500 and Dow haven't been able to exceed Friday's highs, the Russell 2000 and Nasdaq are making higher highs for the move. That's good news. The Nov. 7 post-election gap is at 825.64, still a long way up from here. That's a likely upside objective for this move, once the short-term overbought condition has been relieved.

Russell 2000
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As for the SPX, the Nov. 7 gap is way up at 1428.39, and that, too, is a target once the overbought condition is relieved. I was amused to hear Bill Griffith on CNBC quote some knucklehead who reported that the market had now completely recovered its losses since the election. That isn't true at all, unless you are talking about Apple (AAPL).

Speaking of which, Apple is one of the few stocks that have completely retraced their losses since the election, and those were pretty serious losses. In fact, since the market bottomed, Apple has been one of the big leaders on the upside. The stock has popped 85 points on an intraday basis -- a staggering 16.8% in about six sessions.

Of course, during the drop into the Nov. 16 lows, that gap that I wrote about a couple of weeks ago, at the $530 level, was easily filled, and the stock continued dropping though the May 18 lows. At the intraday lows on Nov. 16, the stock was off almost 200 points from its September peak. Not a bad retracement. I wasn't thrilled about the continued slide, but I was selling January $450 and $480 puts into that drop, and those puts have collapsed since then. Now my accounts are all pretty well hedged. The 50% retracement is at $605. There is also a gap at $604, so maybe that will do it for now.

The volatility index (VIX) didn't explode during the selloff into the Nov. 16 lows, but it heated up above 18, and that was a plus. I am not thrilled to see it back in the 15 area.

Similarly, the McClellan Oscillator got quite oversold on the Nov. 15 close and settled at -284. That was one of the most oversold readings of the past few years. That was a big screaming buy signal. But now, with the oscillator coming off Friday's overbought +148 and yesterday's mildly overbought +108, I can't justify buying in here at all, though I may find a way to add to positions in front of the next seasonal pattern which kicks in on Friday and carries through much of next week.

Bottom line is, for now, I am not a buyer, and I have turned cautious for the short term. But I will likely add to positions into weakness over the next few days.

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