Market’s Short-Term Buy Signal Still in Force

by Sam Collins | July 17, 2012 2:30 am

The stock market suffered its seventh decline in eight sessions on Monday when lower-than-expected retail sales were reported. But Citigroup (NYSE:C[1]) beat estimates, and expectations grew that the big banks will continue to report better-than-expected Q2 earnings.

At Monday’s close, the Dow Jones Industrial Average was down 50 points at 12,727, the S&P 500 fell 3 points to 1,354, and the Nasdaq was off 12 points at 2,897. Volume on the NYSE declined to 601 million shares, and the Nasdaq traded just 354 million shares. Decliners edged out advancers by a slight margin on the Big Board, but on the Nasdaq, decliners were ahead by 2-to-1.

07 17 12 dji Market's Short Term Buy Signal Still in Force

chart key Market's Short Term Buy Signal Still in Force

The Dow, like the Nasdaq, which we reviewed Monday[2], is trading within a symmetrical triangle dominated by an inflection point. That point is at 12,715, give or take 10 points. And the overall pattern of converging moving averages is similar, too, as are the range-bound support and resistance lines of the triangle, which are 12,500 to 12,900. On Friday, the stochastic flashed a near-term buy signal, which is still in force despite Monday’s 50-point hit.

07 17 12 uup Market's Short Term Buy Signal Still in Force

For several years, we’ve been told “dollar up, market down.” However, historically it has been the opposite. And since March, the old pattern of dollar up, market up has reasserted itself.

Currently the U.S. dollar, as evidenced by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP[3]) is trading in an intermediate-term bull channel. Note the gap at $22.57 to $22.78. Since it is a continuation gap versus a breakaway gap, that hole in the chart will likely act like a magnet, so look for more selling near term. Yesterday’s decline was preceded by a short-term sell signal from the stochastic, which supports this view.

Conclusion: The summer doldrums are upon us, and with them comes low volume but high volatility since stocks are being traded by few investors. The market is dominated by traders, and so the whipsaws experienced lately will likely continue until prices break from the triangle, at which point we will know the real direction of the market.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

Endnotes:
  1. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  2. we reviewed Monday: http://investorplace.com/2012/07/daily-stock-market-news-has-the-market-been-rescued-from-the-bears-claws/
  3. UUP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UUP
  4. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  5. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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