The major stock indexes traded down today on the backs of weak earnings from Alcoa, with modest losses run on increasing volume.
Officially, the Dow Industrials fell 0.3% on NYSE volume of 5.4 billion shares, while the NASDAQ fell 1.3% on 2.4 billion. The leadership profile remains positive, with 310 stocks making new highs versus 37 making new lows.
The short term momentum oscillators remain positive, confirming the bullish stance of the AlphaKing Trading Indicator. We have no new trades at this time.
The bulls took a day off today, with the S&P500 suffering its first close in the red for 2010. So far the technical damage is very modest, and it remains way too early to make any serious conclusions regarding the trend reversing from up to down. We have repeated often of late the inherent dangers of a harsh reversal from the current technical set-up, while mentioning the melt-up potential to test Dow 12,000 (if the bulls can breakout of the current resistance shelf.)
The monthly chart going back to the 1970s shown below highlights where that Dow 12,000 analysis comes from, as we view the current rally as a potential right shoulder of a head and shoulders topping pattern. The mega rally off the 1970s base first ran into trouble in the 2000 peak (left shoulder,) with the first touch of neckline the pullback to Dow 7000 in 2002. The 2003-2007 rally to Dow 14,000 marks the head. The 2007-2009 bear plunge retested the Dow 7000 neckline, as a prelude to the current rally to complete the right shoulder of the head and shoulders top. Since right shoulder moves often end where the left shoulder ended, Dow 12,000 is a very logical target for the current rally to peak.
The Dow has struggled of late at the 50% retracement level of points lost during the 2007-2009 bear plunge, so there is no guarantee that the Dow bull run has further to go at all, let alone for a bull nirvana melt-up to test 12,000. Cycles do remain positive until March, thus the trend remains the bulls to lose, and the melt-up potential will remain a part of trading life until we see persistent signs of heavy volume distribution selling that confirms the rally top is in. 50% long, 50% cash, remains the optimal mix for these very tricky and potentially very volatile times, as the yin and yang of melt-up versus a reversal crash plays itself out over the next month or so.
401K investors should have ½ of their portfolio invested in a stock index, or aggressive growth, mutual fund, with the other ½ remaining in a money market fund.
The Index portfolio is ½ invested in QQQQ with the other ½ remaining in cash.
Kevin Wilde, Chief Trading Strategist AlphaKing.com.
