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Dear TTO Subscribers,

Holiday Schedule: The markets are closed on Monday January 15. I will send the weekend report late Friday evening. Our offices will be closed on Monday the 15^th. Our regular schedule will resume on the 16^th.

Here is the Deal:

There was no dramatic gap higher at the open, but the market was clearly in the mood to run. In keeping with my expectations from the weekend, prices are firming over the second half of the week. The rally was broad and strong despite weak oil prices, which continue to weigh on the energy sector. The Bank of England raised rates overnight and in the grand scheme of things it is not viewed as a negative. With some upside momentum, the stage is set for the Dow to make its move.

The Dow blasted higher through minor 12,460 resistance. It pushed above the 76% retracement line at 12,523 and that suggests we will see a full retracement to the 2007 high. Most likely it goes higher. As is typically the case, minor resistance of 12,460 now becomes minor support. Seeing a sustained move below 12,500 will not be bullish. Sliding below 12,460 will be flat out bad for the bulls. We have a refined upside Fibonacci extension target zone, 12,660 to 12,680.

While we have a solid thrust higher, the Dow and S&P 500 have not broken out to the upside yet. They are on their way and have some momentum, but the SPX needs to go above 1430 and the Dow needs to blast above 12,580. The high level consolidation seen over the second half of the day is a constructive pattern for the bulls, so the stage is set for an upside breakout, after taking a moment to catch its breath.

Could I have some economic data please! Sorry, you will have to wait until Tuesday, really Wednesday when the big PPI report comes out. Wednesday and Thursday next week are very heavy economic data days and that is also when the flow of earnings reports starts coming on strong.

With a healthy move higher on Thursday looks for the high level consolidation to persist on Friday, should get a poke up to new highs, but with a long weekend ahead some may look to book some quick profits going into the weekend. As long as prices hold above Wednesday’s highs the bulls are in good shape.

I will have a brief mid-day comment on Friday and a full report Friday night. After that I am going to enjoy the long weekend. Go Saints.

Here is the Deal:

While the Non-Farm payroll number was strong there was a slight problem with the average hourly wage growth number. It was a little bigger than expected. Well, with the US economy at virtual full employment, what do you expect? Actually, the weakness began in overnight trading. The S&P futures were down about six and a half points before the NFP report and rallied a couple points on the news. The strength was short lived as prices were never set to open higher. With the volatility of the short week no one wanted to support anything early in the day. After the 11:30 AM low the major indices spent the day trying to hold above their key support levels, which were severely challenged but not broken on a closing basis.

Since the first of the year most markets have had a serious case of Sell the News, any news. The Dow tested 12,400 and this time it cracked. It took a heavy round of programmed selling to knock it down, but it cracked and that is what is important. In the lunchtime update I thought prices would recover as we have seen afternoon buying over the past few days. Prices re-tested the low and held up for the rest of the day, but it was not a robust recovery. It appears we have a minor consolidation within a clear down trend. Lower support is 12,340 followed by a Fibonacci downside target line at about 12,300. The Fib line is in the middle of the two support levels, 12,350 and 12,240.  

The November highs were about 12,350 so there should be good support between 12,240 and 12,300. At this point we have not seen any major support levels broken. Internally the market is closer to oversold than overbought and the economic backdrop appears solid. The anxiety of the current action revolves around the fact it is the first of the year and the fact the market is again confronted with the strong economy / we want a rate cut issue. As we move away from the turn of the year these forces should settle out, likely in favor of the bulls.

The economic data calendar is a bit slower this week. We do get December retail sales on the 12^th, and they should be in line to better than in line. The question is will a strong number be considered good or bad by then.  Monday we get consumer credit for November and nothing on Tuesday. Seeing how the market performs without a heavy new item to “sell” in reaction to will be telling. Another factor is seeing how foreign markets stabilize at the first of the week. Prices may remain weak but should firm up towards the end of the week as the next longer-term cycle low approaches.