Institutions Will Keep Santa Away

The jury is still out about market direction in the last few weeks of 2004. When the rally started losing steam two weeks ago, I picked up a few bearish divergences that could have signaled a retreat to lower prices. But the major averages have held up well since then.

We're sitting just above key levels that could trigger a spike over 1200 on the S&P 500 and 2200 on the Nasdaq Composite. But the next rally probably won't show the broad participation we saw in November. The primary reason is that a lot of smart money has been moving back to the sidelines in recent weeks.

Part of this distribution process relates to simple profit-taking. Many funds and individual traders are showing decent returns for the year and don't want to screw up their profit-and-loss statements with so little time left before January.

The other aspect of this phenomenon is more critical to the market's future: Fewer opportunities are presenting themselves these days. In fact, I've been startled that so few good setups are showing up on my nightly scans, considering that the indices are near 52-week highs. This isn't the natural state of things.

At the least, there should be dozens of stocks showing bullish continuation patterns, such as triangles or rectangles. Instead, I'm seeing a multitude of topping or rollover patterns from recent highs. Anecdotally, this makes a poor argument for the indices to continue their rallies, at least in the next few weeks.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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