What’s Happening?

Last Friday the Dow Industrials got to within less than one point of the magic 20,000 level but failed to get through. The bigger question now, however, is having come so far so fast already, can the Dow go much farther from here as the post-election rally ends and earnings season approaches. 


Technicals:

The Dow staged a huge rally up off its election night low near 17,500 soaring initially toward 19,200 then up into the 19,700 to 20,000 zone. Over the last month, multiple attempts to breach 20,000 have failed indicating strong resistance emerging there. 

It’s unclear if this is a top forming or a pause within an ongoing uptrend. The RSI indicates the index had become extremely overbought and with upward momentum slowing a significant correction looks possible. On the other hand, higher lows are forming an ascending triangle which indicates continued accumulation.

On a breakout from the current rang, initial measured resistance may appear near 20,160 then 20,300. On a breakdown, next support may appear near 19,615 then 19,485 and 19,405 a 23% retracement of the recent uptrend. 

 

Fundamentals

Although it’s a lighter week for economic news, there are a number of factors that could impact trading in US Indices this week. 

Now that we are past the end of the year, the huge rush to get capital into the market before the end of 2016 has faded. A loss of urgency among bulls and the achievement of a big technical objective could encourage some profit-taking among short-term players. 

Earnings season starts next week so this week we could see companies issue profit warnings as part of so-called “confession season”. Because so much hype and anticipation has been built into shares lately, any disappointment could really rip the rug out from under individual stocks and sectors. For example, a profit warning from Macy’s last week sent its shares down 14% and dragged on other retailers (US retail sales on Friday may also impact retailers).    

At this point markets have priced the Trump Presidency to perfection but it’s still unknown what will be a priority, what he can actually get done in a reasonable amount of time. Any bumps in the road or hiccups could impact stocks and there is also the possibility of profit taking heading toward his inauguration when the rubber hits the road. 

Speaking of which, this could be an active week for the auto sector around the Detroit Auto Show. Usually, its new models and innovations that dominate the headlines. This, year, however, production locations and politics may also generate a lot of interest. Since the election of Donald Trump, some automakers like Ford have changed their minds about moving production to Mexico while others like Toyota may dig in their heels. Driverless cars, increased competition in alternative energy vehicles (affecting companies like Tesla Motors Ballard Power and others) and the automation of production may also be topics of interest.  

Finally, keep an eye on guidance for indications of whether the benefits of a stronger US economy are being outweighed by the costs of the higher US Dollar on exports and USD earnings of overseas operations. Corporate earnings remain the key to index trends and it’s still possible the negatives of the higher Dollar could arrive long before the positive benefits of policy/regulation changes or infrastructure spending. 


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