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Mini Pullback Does Not Change Overall Trend

By: Sam Collins
Posted: 1/14/2011 3:53:00 AM
Referenced Stocks: MRK

Yesterday, a pre-opening report of more jobless claims than expected doomed the market to a lower opening. And a rebound late in morning from successful bond offerings in Spain and Italy only lasted several hours before selling drove the indices lower than the opening decline.

The worst performer of the Dow Jones Industrial Average was Merck & Co., Inc. (NYSE: MRK ), off 6.6%, after halting a study of an experimental clotting drug in which the firm had placed confidence.

The jobs data report hung over the market like a rain cloud throughout the session. Jobless claims were expected to drop by 2,000 to total 407,000. Instead the jobless number increased by 35,000 to 445,000. The result was especially felt in the materials sector as metals weakened. Alcoa Inc. (NYSE: AA ) fell 3%, Newmont Mining (NYSE: NEM ) was off 1.7%, and Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX ) fell 3.1%.

In other economic news, the U.S. producer prices jumped 1.1% in December. After removing food and fuel, the index rose by just 0.2%, which was in line with most forecasts. The U.S. trade deficit declined for the third straight month in November. But the gap with China increased. The Bank of England and the European Central Bank left interest rates unchanged. And Fed Chairman Ben Bernanke told CNBC that he expected growth this year to be in the range of 3%-4%.

Treasurys rose in price taking the yield on the 10-year note down to 3.3%. The euro rose to $1.3354, up from $1.3133 on Wednesday.

At Thursday's close, the Dow fell 24 points to 11,732, the S&P 500 was off 2 points at 1,284, and the Nasdaq fell 2 points to 2,735.

Crude oil for February delivery fell 46 cents to $91.40 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) fell 20 cents to $69.89. February gold rose $1.20 to settle at $1,387 in reaction to the rise in jobless claims. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) fell 7.41 points to 208.74, continuing from the break of its 50-day moving average last week. The next support for the XAU is at 206.

What the Markets Are Saying

With the stock market closed on Monday for Martin Luther King, Jr. Day, it will be interesting to see if today traders decide to cap some of their gains prior to the three-day weekend.

Yesterday's mini pullback doesn't change any trends. It was an extension of the selling that began at noon on Wednesday and continued throughout yesterday until a bounce at the end of the day bumped into a resistance line drawn from Wednesday's high. If stocks close higher today, that line will evaporate.

In line with my recent comments on when to sell, today we'll consider the most talked about but least understood reversal of all - the head-and-shoulders. Readers will remember the pseudo head-and-shoulders top in the S&P 500 that occurred this past summer. The top has some very strict rules that I pointed out at that time: Left shoulder volume higher than either the head (top) or the right shoulder, and a 3% penetration of the neckline. Going back to July 2, I observed, "But, in order to have a confirmed head-and-shoulders, we must have at least a 3% penetration of the neckline." The pseudo head-and-shoulders of July fell 2.5%, just missing the final ingredient of a completed signal by 0.5%. But that small margin was enough to abort the entire formation and the S&P 500 turned north." In other words, I disagreed with other technicians saying that the reversal down had been thwarted and that the uptrend was still intact.

Today, we will also talk about another type of head-and-shoulders, but this time it is the bullish head-and-shoulders bottom that is illustrated in today's Trade of the Day .

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

If you have questions or comments for Sam Collins, please e-mail him at .