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Friday, December 5, 2008

Time For The Major Indexes To Breakout

Time For The Major Indexes To Breakout

The November job report was horrendous. Nonfarm payroll dropped by 533,000 jobs, the largest drop since 1974, and the unemployment rate jumped to 6.7%. But once again, stocks were able to fight off the bad news. In the end, the bulls claimed victory for the day. The DJIA went from a triple digit loss in the morning to a triple digit gain at the close, up 259.18 points (+3.09%) to finish the week at 8635.42. The S&P 500 finished up 30.85 points (+3.65%) at 876.07 while the NASDAQ gained 63.75 points (+4.41%) at 1509.31.

The market internals totally turned around as prices reversed and finished in definitively positive territory. Advancers led decliners by a 7 to 3 ratio on the NYSE and by a 9 to 4 ratio on the NASDAQ. Volume expanded some from yesterday. About 85% of the volume was on the upside on both marketplaces. The financials (ETFs: XLF, UYG and FAS) were able to hold ground early in the morning backstopping the overall market from a larger decline in the face of the horrific employment data and provided leadership in the afternoon rally. The energy names which were the major drag in the DJIA in the morning were also able to turn around in the afternoon, adding strength to the afternoon rally.

Today's reversal on bad news suggests that “buying on the dip" is at work which should limit the downside risk in this market. VIX once again fell under its 50 day moving average suggesting a reduced fear level in the market. With a lighter week in terms of economic and corporate events, I expect bullish momentum to continue into next week. This doesn't mean that we won't see a pullback like what we had yesterday. Additionally, the major indexes still need to break above their respective resistance levels to change the longer trend to up.

Resistance for the DJIA is at 8831 (November 28 high) followed by 8985 (50 day moving average). Resistance for the S&P 500 is at 896 (November 28 high) followed by 916 (November 14 high) with 50 day moving average at 936. The NASDAQ broke above its 20 day moving average today and is now looking at the 1535 (November 28 high) resistance level followed by the 1596 level (November 13 high).

by Yin Lin, CFA

Significant Numbers To Watch

7449-Support, the 11/21/2008 low
9653-Resistance, the 11/04/2008 high
9033-50-day simple moving average
11263-200-day moving average

S&P 500:
741-Support, the 11/21/08 low
1007-Resistance, the 11/04/2008 high
942-50-day simple moving average
1224-200-day moving average

1295-Support, the 11/21/08 low
2200-Resistance, the 10/14/2008 high
1666-50-day simple moving average
2178-200-day moving average