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Sell on the First Sign of Strength

A number of potential pitfalls could trip up the bulls


Stocks opened higher Monday following the Greek election. But even as Greece struggled to put a government together, another European problem erupted as Spanish borrowing costs shot through the roof. The Spanish 10-year note’s yield rose above 7%, and with it another rush to buy U.S. dollars.

The hope of some form of monetary easing from the Fed last week resulted in a mixed close yesterday. The Dow Jones Industrial Average fell 25 points to 12,742, the S&P 500 gained 2 points to 1,345 and the Nasdaq rose 23, closing at 2,895. The NYSE traded 706 million shares and Nasdaq crossed 424 million. Advancers were ahead of decliners by 1.4-to-1 on the Big Board but break-even on the Nasdaq.

Trade of the Day Chart Key

In the wake of headline news that the Greeks had in effect voted to stay in the eurozone, it was obvious that forming a coalition from so many disparate parties would not be easy. Headlines also trumpeted that Spain was again borrowing at rates that could lead to even more trouble. Result: Money flies to the dollar, resulting in a continuation of the bull market in the buck that began last summer.

With a break through the resistance, now support, at 1,336, the bulls have made a higher high and thus reversed the short-term trend to “up.” Yesterday slightly extended the trend but stopped short of penetrating the 50-day MA at 1,347. To confirm the new trend, the index must successfully overcome the 50-day MA and the resistance line at 1,358, which is the breakdown line from the bearish double top.

Conclusion: Stocks jumped late last week on “a hope and a prayer” again propelled by headline news but backed with little in the way of breadth or volume (Friday’s high volume was the result of a quad options expiration). The bulls hope that Europe’s mess can be cleaned up this summer. They also hope that the Fed will provide another liquidity event, be it QE3, an extension of Operation Twist or targeting GDP. And they pray that the Supreme Court will reverse “Obamacare.” A disappointment in any of these areas along with more potentially negative surprises adds up to a very tentative short-term uptrend. Thus, strength on low volume should be again used as a selling or shorting opportunity.

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.

Article printed from InvestorPlace Media, http://investorplace.com/2012/06/sell-on-the-first-sign-of-strength/.

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