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The SPX (SPX | Quote | Chart | News | PowerRating) advanced seven days from 1245.74 to into the key price zone of 1290 - 1296 and primary time zone of January 11 - January 13, then reversed on the 8th day to 1286.06, -0.7% with the intraday low yesterday of 1285.04. The Dow went out at 10,962, -0.7%, then the QQQQ, -0.5% to 43. Both the 4 MA of the volume ratio and breadth was short-term overbought going into yesterday with the 4 MA of the volume ratio at 60 and 4 MA of breadth +872. NYSE volume was 1.7 billion shares and the volume ratio of 32 as the cyclicals led the downside yesterday at -1.6% and the OIH (OIH | Quote | Chart | News | PowerRating), -2.1% with XLE, -0.7%. This highlights the difference in the component stocks. The drillers in the OIH like Noble Corporation (NE | Quote | Chart | News | PowerRating), -2.6%, Ensco (ESV | Quote | Chart | News | PowerRating), -2.5%, Smith International (SII | Quote | Chart | News | PowerRating), -2.5%, Diamond Offshore (DO | Quote | Chart | News | PowerRating), -2.0% and Grand Prideco [GRP|GRP,] -2.8% were the main factors in the OIH decline. The OIH was obviously very extended going into yesterday having advanced +11.4% over the previous 7 days, so any decline is no surprise and certainly overdue.
The SPX traded in a very narrow range until daytraders got their short opportunities on the breakout of the contracted volatility pattern below 1291.56 which declined to 1285.04 closing at 1286.06 (see chart). The SPX has initial support at the 1276 zone which includes a .38 retracement to the January 3, 2006 low of 1245.74 and also at the August 3, 2005 previous rally high level prior to the October 13, 2005 1168.20 low. The 20-day EMA is right below the initial support at 1272.55, a .50 retracement just above 1270. I expect some technical buying on any retracement to the previous trading range zone 1276 high and even if there is a deeper retracement, I expect that measured Wave 5 SPX zone above 1300 to get tested before any significant decline.
Have a good trading day.
Kevin
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