The S&P 500 rose Tuesday for the fourth consecutive day on rumors and hopes of a new Fed stimulus plan to be unveiled today. This hope was encouraged by a report of slower-than-expected homebuilding in May, and a Redbook report showing that same-store sales in the week of June 16 were less than expected.
At Tuesday’s close, the Dow Jones Industrial Average was up 96 points at 12,837, the S&P 500 rose 13 points to 1,358, and the Nasdaq was up 34 points at 2,930. Volume on both exchanges was light with just 771 million shares traded on the NYSE and 467 million on the Nasdaq. Advancers led decliners on the Big Board by 5.2-to-1 and by 3.2-to-1 on the Nasdaq.
On June 4, the Daily Market Outlook said that our internal indicators were so deeply oversold that the likelihood of a bounce was high. However, the ultimate downside target was stated to be no less than 1,258 on the S&P 500.
And on June 5, I noted the reversal with a buy signal from our internal proprietary indicator, the Collins-Bollinger Reversal (CBR). I further said, “The market is overdue for a rally, and so I caution short sellers to nail down their profits and traders to sell into a rally that could bounce for 2% to 5%.”
The S&P 500 closed Tuesday up 7.2% from the June low. In a highly charged and volatile market, with domestic as well as international implications, it is not unusual for the major indices to rebound to the breakdown lines and necklines of head-and-shoulder tops — and I believe that is exactly what has occurred.
A Fibonacci retracement of the March high of 1,422 to the June low of 1,267 produces a target of 1,363. Tuesday’s high was 1,363.46. (Thanks to Mike, one of our faithful readers, for pointing out the Fib numbers yesterday.)
Several readers wondered why I haven’t mentioned the inverse head-and-shoulders formation on the S&P 600 (see the black “?”s on the chart above).
Head-and-shoulders formations almost always occur at major tops and bottoms. For example, there is no mistaking the shoulder-head-shoulder of the February-to-May top.
But the recent pattern is merely a consolidation within an intermediate sideways trend. It carries neither the breadth nor volume of a major formation, and it occurs immediately following a major head-and-shoulders top. This dog won’t hunt!
Conclusion: The recent rebound is based on the hope that today the Fed will announce a new major stimulus plan — perhaps even QE3. Solid changes of trend are seldom based on hope and emotion. But many false rallies are the result of emotion characterized by high volatility.
I could be wrong, but experience tells me that if the Fed fails to deliver a highly charged new round of stimulus, it is likely that the top of the current rally occurred Tuesday.
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.