by Sam Collins | July 16, 2012 2:55 am
On Friday, strong earnings from Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) led a rush to buy financial stocks. And that triggered buying for the broad market that wiped out the losses resulting from four days down. A stronger-than-expected PPI helped the bulls, while a Michigan Sentiment survey that fell short of expectations was ignored.
At Friday’s close, the Dow Jones Industrial Average was up 204 points at 12,777, the S&P 500 rose 22 points at 1,357, and the Nasdaq jumped 42 points to 2,908. The NYSE traded 682 million shares and the Nasdaq crossed 360 million. Advancers outpaced decliners by almost 5-to-1 on the Big Board and 2.75-to-1 on the Nasdaq.
Friday’s rally not only overcame a poor start to the Q2 earnings season, but stabilized a technical situation that was rapidly falling into the clutches of the bears. The rally by the broad-based S&P 500 removed the immediate threat of a break of the 50-day moving average and triggered a short-term buy signal from the stochastic. It also reinforced the overall pattern called a symmetrical triangle, while prices edge closer to the apex of that triangle.
The Nasdaq’s chart has an interesting characteristic, and that is the “inflection point” at 2,900. An inflection point is a point on a chart that marks the beginning of a significant move or point of action. Note that prices have traded around 2,900, the approximate top of a small gap in early February, a bottom in early March, and again in May, and the midpoint of price movement since late June.
Friday’s bounce from the support line of the symmetrical triangle, which drove the index to close over its 50-day moving average at 2,895, and the inflection point at 2,900, mark an unusual bullish event.
Conclusion: While one day does not create a trend, one day can provide important clues as to the market’s next move. Despite other signals or indicators, we always give precedence to price movement that penetrates trendlines, moving averages and inflection points — the latter of which become apparent after many months of back-and-forth trading.
Last week’s AAII numbers also support a more bullish tone. The July 12 sentiment survey, a contra-indicator, fell to 30.23% from 32.64% with the comment that, “This is the longest streak of consecutive below-average bullish readings since a 29-week period that ran from April 2, 1993, until October 15, 1993.”
Nothing is yet conclusive, but Friday’s tape action favored the bulls. Now we will see if they can follow up with a continuation rally that breaks from the apex of a triangle that has taken four months to form.
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.
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