On Tuesday, European stocks rebounded as Spain’s bond yield dropped and the EU eased loan restrictions. But that didn’t help stocks trading on this side of the pond. Q2 earnings have been disappointing thus far, and there was a string of lowered estimates by well-known names like Caterpillar (NYSE:CAT), Applied Materials (NASDAQ:AMAT) and Cummins (NYSE:CMI).
At Tuesday’s close, the Dow Jones Industrial Average was off 83 points to 12,653, the S&P 500 fell 11 points to 1,341, and the Nasdaq gave up 29 points at 2,903. The NYSE traded 727 million shares and the Nasdaq crossed 456 million. Decliners exceeded advancers by 2-to-1 on both exchanges.
Of the major indices, the Nasdaq has been the leader and the most volatile. Therefore, it is worth focusing on for clues to the market’s next move. A study of the support and resistance areas using several methods of analysis will enable us to put together a picture and provide tools that will benefit both traders and intermediate stockholders.
This chart illustrates the significance of intermediate trendlines, moving averages and the stochastic indicator.
Note that a resistance line is just under the June high at 2,988, which was registered four sessions ago. And there are several significant support lines at 2,882 and 2,830. Thus, short-term trading is currently bracketed at 2,830 to 2,988.
Within this zone there is a crossover by the 20-day moving average through the 50-day moving average — a bullish indication. Also note the bearish indication in early May when the 20-day crossed down through the 50-day just before the Nasdaq plunged from 3,050 to 2,750.
Finally, consider the stochastic — two short-term sells and one short-term buy. The current signal is “sell.”
Another Nasdaq chart with the same time frame enables us to examine several more methods of analysis.
First, note the bull channel with support at 2,850 and resistance at 3,000, which is very close to the previous chart’s trading zone of 2,830 to 2,988. The two methods, then, roughly confirm each other.
MACD is a reliable internal indicator that is superb for flashing intermediate changes in trend. Note the MACD sell at the end of March and the fall in price, and then another sell at the beginning of May and the subsequent plunge in price. At the beginning of June, MACD flashed a significant buy signal at the low point of the current bull channel. That signal is still in force despite the hook in its short-term red line. Don’t be fooled — it could turn up with a two-day rally, and in a flash the index could challenge the resistance at 3,000. It is never wise to anticipate a change in trend since the result could be a nasty whipsaw.
Conclusion: The Nasdaq, the market’s leading index, is currently within an intermediate bullish trading zone with support roughly at 2,850 to 3,000. The recent four-day pullback appears to be nothing more than a short-term correction since the three most reliable tools on these charts — the moving averages, MACD and the support/resistance lines — all point upward.
Be patient, study the indicators, and let the market tell you what it is doing. Make changes only when the indicators change.
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.