A week in which there were four successive down days closed with a whale of a rally that obliterated the four accumulated losses. Igniting the buying was the largest monthly gain in nonfarm payrolls since February, a better ISM services number, large purchases of Spanish and Italian bonds (which had been sold on Thursday), and optimism that China and Brazil’s slowdowns may be flattening.
But the unemployment rate jumped a notch to 8.3%, and even the president admitted that the recovery is moving slowly. The Commerce Department reported that the economy expanded at a 1.5% annual rate in Q2, which is less than the administration’s growth target.
At Friday’s close, the Dow Jones Industrial Average was up 217 points to 13,096, the S&P 500 rose 26 points to 1,391, and the Nasdaq jumped 58 points to 2,968. The NYSE traded 752 million shares and the Nasdaq crossed 448 million. On the Big Board, advancers led decliners by 4.75-to-1, and on the Nasdaq, advancers were ahead by 3.4-to-1. For the week, the Dow gained 0.2%, the S&P 500 rose 0.4%, and the Nasdaq was up 0.3%.
The Nasdaq broke its trendline resistance at 2,950. Its next target is the July high at 2,988. MACD is positive but fails to confirm a breakout.
The S&P 500 has broken its July 30 high and trendline at about 1,363 (not shown). Like the Nasdaq, its MACD is positive but has not confirmed a breakout. The next target for the S&P 500 is the April closing high at 1,406.
The Dow Jones Industrial Average topped its July high of 13,128 but is still trading in a bull channel. Its next target is the May 1 closing high of 13,279. MACD is positive and confirms the new high.
The Dow Jones Transportation Average is still trading in a symmetrical triangle with a negative MACD. Its 20-day moving average has crossed below the 200-day and 50-day moving averages — a short-term sell signal. The Dow transports do not confirm the new high of the Dow industrials, and so there exists a major Dow Theory divergence (non-confirmation).
Conclusion: There is no getting around the fact that Friday’s rebound strengthens the bullish viewpoint. However, the bulls face some serious obstacles that will likely lead to an overall failure of what appears to be a series of intermediate-term breakouts on the major indices:
1. Volume of just over 750 million shares on the NYSE with mediocre breadth indicates a lack of institutional commitment.
2. Serious overhead (possible sellers) remains on all charts; and
3. Most importantly, a Dow Theory non-confirmation is in place.
Even if the Dow Jones Transportation Average was not in divergence with the industrials, it is difficult to support a theory that the economy is moving ahead while its movers of goods are standing idle.
However, the overall market is still bullish long term (see Thursday’s 17-month S&P 500 chart). Thus, all deep corrections should be used as buying opportunities.
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.