Hold Off on New Positions Until the New Year

The holiday respite ended yesterday as bad news from Europe shook investors from their five-day focus on an improvingU.S.economy. The euro fell to a 14-month low, which reflects investors� lack of confidence after the European Central Bank accepted $590.72 billion from its member banks — an indication that the banks have lost confidence in each other.

The lack of confidence inEurope�s financial system drove the U.S. dollar and U.S. Treasuries higher and the S&P 500 to a loss for the year. The Dow Jones Industrial Average fell 140 points to 12,151, the S&P 500 lost 16 points, closing at 1,250, and the Nasdaq fell 35 points to 2,590. Volume on the NYSE totaled 542 million shares. The Nasdaq traded 283 million. Decliners outnumbered advancers by 4-to-1 on both exchanges.

The euro made a new low yesterday, and that could spell trouble for U.S. stocks and commodities. But despite a new stochastic sell signal, the currency is extremely oversold and a bounce back to above $1.30 is needed to show confidence in its recent financial pacts.

But if the dollar, as illustrated by the PowerShares DB US Dollar Bullish Fund (NYSE:UUP), follows through from yesterday�s rally and closes above its high at $22.70, the recent rally in stocks will likely turn into a bull trap with stocks retreating to the October/November trading zones.

The U.S. indices are on shaky ground as depicted by the possible false breakout of the S&P 500. Yesterday�s retreat to under its 200-day moving average and the bearish resistance line drawn from the June/July tops is a weak technical signal, as is the arching down of the fast line of the stochastic.�

Yesterday�s failure to hold above its recent high was also confirmed by the more speculative issues. The Russell 2000 shows a clear reversal from a triple-top, along with a new stochastic sell signal. Thus, yesterday�s turn down was not confined to just the broad-based, quality-oriented indices.

The Dow transports are linked directly with economic activity since they represent the movement of goods. Thus the index�s possible failure to follow through casts a shadow on the predictions of an economic recovery in 2012. Yesterday it closed slightly below the important support line at 4,975, its 200-day moving average. A failure to regain ground would be another negative indication.�

Conclusion: Just as investors were putting the woes of Europe�s mess behind them, theOld World�s economic stresses surfaced to spoil the holiday mood. Therefore, it would be wise to hold back on new positions, except for hedges, until the market reveals its next move. With most charts at the apex of ascending triangles, it shouldn�t be long before that direction is known.

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