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Stocks Set to Bungee from Fiscal Cliff

A Dow Theory Sell Signal occurs given a daily close below the June 4 closing low at 4847.73. Dow transports traded below that level intra-day on Friday before the fiscal cliff meeting ended. Monthly and weekly pivots are 5056 and 5096.

Analysis of the Russell 2000 (776.31): Up 4.8% year-to-date, is down 11.9% since its QE3 reaction high, is down 6.4% since the election and rebounded 1.7% on Friday after the fiscal cliff meeting.

The daily chart shows a potential key reversal.

This index of small cap stocks set a post-QE3 low at 763.55 on Friday then closed at 776.28 above Thursday's high at 775.08, which is a "Key Reversal Day."

Higher closes today and Tuesday confirm the key reversal signaling a Thanksgiving rally, which could be the start of a Santa Claus Rally.

You can observe the key reversal day on the daily bar at the far right of the daily chart below. Also note that the momentum (12x3x3 daily slow stochastic) reading at 11.09 is well below 20.00 and thus is extremely oversold. There is a potential rebound to the 200-day simple moving average at 806.83.

Such a rally would still have the Russell 2000 below the five-week modified moving average at 809.43, which would keep the weekly chart profile negative. This week's value level is 766.63 with a monthly pivot at 807.15.

Chart Courtesy of Thomson/Reuters

While investors know that Congressional leaders are striving for a compromise to resolve the fiscal cliff, they also worry about higher tax rates on capital gains and dividend income.

Market strength off last Friday's lows should continue at least through the quiet trading of Thanksgiving week. This could be the beginning of a Santa Claus Rally if favorable fiscal cliff negotiations hit the tape.

However, if increased taxes on capital gains and dividend income become part of a Congressional deal, investors will likely sell before year end, to buy back in January.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.
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