Futures are basically flat this morning after two very strong days in the market. Friday we got an outside bullish Red Dog Reversal, and yesterday got the follow through to that pattern with the market's biggest gain in more than two months. Futures are holding in this morning despite a Moody's downgrade of France last night. The rating agency downgraded French debt one notch to Aa1, saying its resilience to future Euro area shocks is becoming more difficult to predict.
The market has become very sensitive to headlines over the past couple years, and all it took Friday for the reversal was an indication that talks between Democrats and Republicans on the fiscal cliff were constructive. Both sides appeared to be holding hard lines and digging in following the landslide reelection of President Obama, but during the first talks Friday each side showed more of a willingness to compromise. Progress will likely need to continue, or cuts pushed to a later date, for the market to maintain its bullish composure.
After a powerful reversal Friday and potent move yesterday, it would be healthy to see some digestion in the market now. Consolidation above S&P 1377-1382 would be a healthy sign for more upside. The next micro resistance level is 1391, then there is a bigger resistance zone at 1403-1408 that the bears might try to defend.
Apple (AAPL) led the cavalry higher yesterday, rebounding from heavy selling over the last two months to give the beleaguered market some leadership. Leading stocks, especially in tech, had been breaking down the hardest during this multi-week correction, which is a sign of diminished risk appetite that traders do not like to see. AAPL surged more than 7% yesterday on no news. The stock is still below all of its moving averages, but as we often see, the 21-day MA is acting like a magnet. There is a gap at around $575 in AAPL that could pose as some short-term resistance if we get there over the next few trading days.
Hewlett-Packard (HPQ) is down nearly 11% this morning after "major improprieties" have come to light in its $10 billion acquisition of Autonomy. The "seriously flawed" transaction resulted in a $8.8 billion asset impairment charge that was reported when the company reported earnings this morning. The unforeseen issue was "linked to serious accounting improprieties, disclosures failures and outright misrepresentations at Autonomy that occurred prior to HP's acquisition," said HP.
Best Buy (BBY) also reported earnings this morning and is down around 4% pre-market. The brick and mortar electronics retailer has been in a steady decline for the last several years, declining 71% since April 2010. There have been suggestions by the company's founder that he may attempt to take the company private, but it's clear that online retailers like Amazon (AMZN) are eating Best Buy's lunch at this point.
With Black Friday shopping coming up after Thanksgiving, retailers in general could be in focus. One pattern in particular that looks good is Target (TGT). The retailer reclaimed its 100-day moving average yesterday and has been showing relative strength to the market. The trigger for longs would be a break higher through the 50-day moving average at about $63.30. The more discount retailers like Target, Wal-Mart (WMT) and Costco (COST) are performing better in this slow economic recovery.
The banks also showed relative strength yesterday. The financial sector is especially sensitive to the fiscal cliff negotiations, and we saw them lose their relative strength a bit after the election. Now, though, we could get a powerful bounce in the sector as progress is being made. Bank of America (BAC) was the strongest yesterday after being upgraded to a "buy" by Stifel Nicolaus with a $11 target. I believe Bank of America will become a double digit stock before the New Year and reach that Stifel target early next year.
The action in the market could slow down as we get closer to Thanksgiving, and there is no reason to press the action after two active days in the market. The ability to sit on your hands is a skill in trading. If you want to be constructive while the market rests, take our Free Online Trading Course to sharpen your trading acumen.
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*DISCLOSURES: Scott Redler is long SPY, AAPL, BAC.
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