Santa Claus Rally Skids Toward Fiscal Cliff

NEW YORK ( TheStreet) -- The stock market had been moving higher this week on optimism that President Obama and House Speaker Boehner could forge a compromise to end the fiscal cliff. The president raised his income threshold from $250,000 to $400,000.

Speaker Boehner responded with his "Plan B" plan with a willingness to raise tax rates on Americans making more than a million bucks. Investors and traders assumed that when "Plan B" passed a House vote that a compromise income threshold could be negotiated by the end of the year preventing the fiscal cliff. Last night Speaker Boehner canceled a House vote on "Plan B" as the deal did not have enough yea votes to pass.

Stock market futures took it on the chin in overnight trading, and thus the Santa Claus rally may end in anticipation that there will be no compromise. For this to occur, the major equity averages will have to decline significantly today to end the week below their five-week modified moving averages at 13,084 Dow Industrials, 1411.3 S&P 500 and 2982 on the Nasdaq.

Over the first four days of this week crude oil and stocks were on the rise as gold slumped, U.S. Treasury yields rose, and the euro gained ground versus the U.S. dollar. In the wake of this volatility several important 200-day simple moving averages came into play, which usually confirm trend continuations. The Santa Claus rally appeared to have regained momentum, but now the fiscal cliff looms large, and today's closes will matter.

Analysis of the Yield on the 10-Year Treasury Note: (1.794%) The purpose of QE4 is to keep longer-term U.S. Treasury yields low. Instead, the yield on the 10-year note rose above its 200-day SMA at 1.734%, but my semiannual value level at 1.853% held as expected. The weekly chart profile favors higher yields on a close today above its five-week MMA at 1.668%.

Analysis of Comex Gold ($1649.3): Gold fell below its 200-day SMA at $1662.7 on Thursday to a test of my semiannual pivot at $1643.3. On Monday, I wrote, Prospecting for Gold Stocks saying that the precious metal had been moving sideways to down since Oct. 5 staying above its 200-day, and thus the break below it is a significant technical warning. The weekly chart profile for gold has been negative for the entire month of December. My annual value level lags at $1575.8 per ounce.

Analysis of Nymex Crude Oil ($89.88): Crude oil closed above its 50-day SMA at $87.49 on Tuesday, which I cited as a positive when I wrote Drilling for Energy Stocks to Buy . Holding the 50-day SMA indicates potential upside to the 200-day SMA at $92.37. The weekly chart will end this week with a positive profile with a close today above its five-week MMA at $87.86. Weakness over the past six weeks has stayed above the 200-week SMA at $84.28.

Analysis of the Euro vs. the Dollar (1.3240): The euro has been above its 200-day SMA at 1.2784 since Nov. 22 on a daily chart that shows an overbought condition. The weekly chart shifted to positive at the end of last week with the five-week MMA at 1.2942 and the 200-week SMA the upside potential at 1.3520.

Analysis of the Dow Industrial Average (13,311.72): The Dow set a new QE4 reaction high at 13,365.86 on Tuesday well below the QE3 high at 13,661.87 set on Oct. 5. The daily chart shows an overbought condition. The weekly chart stays positive with a close today above the five-week MMA at 13,084. My monthly value level is 12,826 with my annual value level at 12,312.

Analysis of the S&P 500 (1443.69): The S&P 500 set a new QE4 reaction high at 1448.00 on Tuesday with the QE3 high at 1474.51 set on Sept. 14. The weekly chart stays positive with a close today above the five-week MMA at 1411.3. My monthly and annual value levels are 1378.6 and 1363.2.

Analysis of the Nasdaq (3050.39): The Nasdaq set a new QE4 reaction high at 3061.82 on Wednesday with the QE3 high at 3196.93 set on Sept. 21. The weekly chart stays positive with a close today above the five-week MMA at 2982. My monthly and annual value levels are 2893 and 2698.

Analysis of the Nasdaq 100 (2693.55): The daily chart still shows what technicians call a "Death Cross" with the 50-day SMA at 2657.55 declining below the 200-day SMA at 2673.75. A close below both moving averages today would be a technical warning. The weekly chart shifts to positive on a weekly close above the five-week MMA at 2653. The Nasdaq 100 is well below its QE3 high at 2878.38, set on Sept. 21.

Analysis of the Dow Transportation Average (5357.81): Transports is approaching the upper end of its 2012 trading range at 5390.11 set on March 19. The 2012 low was 4795.28 set on June 4. The daily chart is overbought and the weekly chart stays positive on a close today above the five-week MMA at 5087.

Analysis of the Russell 2000 (852.49): The small cap index moved above its annual pivot at 836.15 with the QE3 high at 868.50 set on Sept. 14. The daily chart is overbought and the weekly chart stays positive with a close today above the five-week MMA at 815.85.

Analysis of the PHLX Semiconductor Sector Index ( SOXX) (389.49): On Thursday, Dec. 20, I wrote, Six Downgrades Sock Stocks in the SOX as the SOX broke out above its 200-day SMA at 388.59 on Wednesday. The SOX traded back and forth around the 200-day on Thursday and a decline today would be a warning of a false breakout. The QE3 high was 410.82 set on Sept. 14, which is well below the year to date high of 444.96 set on March 27. The weekly chart stays positive on a close today above the five-week MMA at 375.32. The 200-week SMA is a major support at 362.39.

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.