The Sledding Gets Tougher

 | Dec 11, 2012 | 5:00 PM EST
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For weeks now, I've been yakking about the likelihood of a return to the gaps from Nov. 7. Those, of course, were the gaps from the down opening following the surge on Election Day, Nov. 6. The close on Nov. 6 marked multi-week highs across the board. Then, the next day, we had the selling "on the news," and that created the big gaps to the downside.

Those gaps have just been filled, though in the Russell 2000, Nasdaq Composite and Nasdaq-100 they've been filled for a while now. The S&P 500 and Dow got it done today at 1428.39 and 13245, respectively. Now things get a little tougher, at least for the near term, as the pop back up to those gaps satisfied the initial objectives of this rebound.

That's not to say that the market can't go higher or that there are no higher objectives. Just that the retracement of the drop after the election was the first major objective of this rebound, and that's now a mission accomplished.

Let's revisit the S&P 500, where the market gapped down from 1428.39 on Nov. 7. Just seven sessions later, the index collapsed to a low of 1343.35, a drop of 85 points. From there, it has taken more than three weeks to retrace that drop, but the index got it done today. I would think that now it's time for a breather. Accordingly, this morning, at the morning pricing at Rydex of 1431.28, I sold some of my SPX positions, cutting back to a maximum of 45% invested. That's a pretty conservative level.

SPX Fills the Nov. 7 Gap

Of note, there is another overhead gap which remains unfilled. That's the one from Oct. 19, the anniversary of the Crash of '87, at 1457.76. That's probably where this thing is headed if the market continues higher over the near term.

Then there's the Russell 2000 small-cap index, which actually filled its Nov. 7 gap at 825.64, over a week ago, last Monday, when it popped up to 826.58. As you can see, the Russell didn't take out that level until today, but also noteworthy is that for the past several sessions, it gave up very little ground as it consolidated its run-up into the Dec. 3 top. That was a bullish omen, not just for the Russell 2000 but for the overall market.

Now, today, it's already working on filling its Oct. 19 gap. So far, it's coming within about 2 points of the top of that gap. If you figure that the last little top on Dec. 3 was marked by the Russell's filling its Nov. 7 gap, it shouldn't come as a big surprise if the top of this current move is marked by the filling of the Oct. 19 gap in the RUT. That gap, as shown below, is at 837.12.

The recent relative strength of the Russell 2000 should not come as a big surprise. The "January effect," though widely misunderstood, is defined by the tendency for small-cap stocks to outperform their large-cap brethren going into year's end and continuing through the beginning of the new year. That has clearly been a factor in the relative strength of the small-caps over recent sessions.

RUT Leads the Charge

While the Russell 2000 traded sideways for the past several sessions, so did the oscillator. Notably, the McClellan Oscillator has traded in one of the tightest ranges I can recall, just 12 points wide, from +66 to +78, over the past five sessions. Today, if the market holds on to its current gains (with the SPX at the 1430 level), we may see this indicator pop back up into an overbought reading.

Meanwhile, the volatility index (the VIX) isn't telling us much as it hovers near recent lows. No new low here, and that is the good news. The bad news is that it's not far from recent lows.

VIX Holds Above Recent Lows

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