Lack of a strong sell-off on Friday may signal a change ahead

Stocks closed mixed on Friday after three days of heavy selling that resulted in the worst week in over a month. The negative impact on stocks of a renewed debt crisis in Europe and a lack of progress on debt reduction from the Congressional supercommittee shook the markets earlier in the week, and on Saturday, The Wall Street Journal summarized the week this way:

�Many weeks have been called the worst of the financial crisis. But this one has as good a claim as any. Wild swings in euro-zone bond markets and a further deterioration in bank-funding conditions have raised many stress indicators to levels last seen following the 2008 collapse of Lehman Brothers. The difference this time is that policy makers have fewer bullets to fire. �

In the midst of the uncertainty, the Dow Jones Industrial Average gained 0.22%, the S&P 500 fell 0.04%, and the Nasdaq lost 0.6%. Advancers were slightly ahead on the NYSE, and decliners were slightly ahead on the Nasdaq. The NYSE traded 954 million shares, and the Nasdaq crossed 498 million shares.

The S&P 500 broke the upward slanting support (red dash) line on Thursday, as well as the 1,220 support line, but stopped short of slicing through the important 50-day moving average line (blue line) at 1,207. A break from a symmetrical triangle is usually followed by a rush to sell, but that did not happen.

And we see a similar picture on the NYSE chart where a right triangle was broken on Thursday, but selling in volume failed to appear on Friday.

However, the market�s leading index, the Nasdaq, did break down from its right triangle, as well as an important support line at 2,600. And the index closed below its 50-day moving average on Friday.

Conclusion: The potential for bad news could hardly be worse, and yet on Friday stocks generally held ground. That could be the result of the expiration of November options and a general lack of interest in stocks by the public. But to som! eone who has traded in volatile markets for over 45 years, I would say that Friday�s lack of a strong sell-off is strange. When the market treats bad news well, or ignores it, watch out — perhaps a change is coming. (Options may be your best bet for profiting in this market.)

On Thursday, Michael Murphy, a cycle theorist, voiced a similar concern: �A reversal tomorrow [Friday] would be the mother of all bear traps, with enough energy to send the S&P hundreds of points higher.�

Even though the market didn�t reverse higher on Friday, but rather traded flat, Murphy has a point. Most likely, with the failure of the supercommittee and thus the potential for another downgrade ofUnited States� credit rating, the downtrend will resume with vigor.

It would be prudent, however, to wait a day or so before entering the market on either the long or short side.� As usual, Mr. Market will tell us the direction of his next move, but we must be patient and sensitive to any pickup in volume by either buyers or sellers.