After four days down, the Dow industrials posted a triple-digit gain in anticipation of Federal Reserve easing and moves by the European Central Bank (ECB) later this week. However, the Dow snapped a six-week winning streak by losing 0.7% for the week.
At Friday’s close, the Dow Jones Industrial Average was up 101 points, closing at 13,159, the S&P 500 fell 9 points to 1,411, and the Nasdaq was off 16 points at 3,070. The NYSE traded 514 million shares and the Nasdaq crossed 328 million. On the Big Board, advancers exceeded decliners by 1.9-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1. For the week, the Dow was off 0.9%, the S&P 500 fell 0.5%, and the Nasdaq was down 0.2%.
Following a losing week and rally on Friday, the chart of the S&P 500 leaves us with mixed signals. Friday’s rally resulted in a buy from our internal indicator, the Collins-Bollinger Reversal (CBR), but MACD flashed a strong sell. Advances will likely be turned back by the resistance at the closing high of 1,418. The major support is at the conjunction of the 50-day moving average at 1,370 and the bullish support line.
The Dow’s failure to achieve a new closing high punctuated by a “key reversal day,” the failure of the Dow Jones Transportation Average to confirm an uptrend, and a strong MACD sell signal will make further upside progress very difficult. The CBR buy signal on Friday could produce a day or two of buying, but the other negatives outweigh further real progress for the bulls.
The trading zone of the Dow Jones Transportation Average is still confined to a right triangle. On Friday, trading was restricted to a tight band defined by a near conjunction of the 20-day, 50-day, and 200-day moving averages. MACD is turning down — another negative.
Conclusion: Even though the S&P 500 and the Dow industrials posted reversals on Friday from our in-house indicator (CBR), the market is in a near-term and intermediate-term downtrend.
Added support for this view came on Thursday when the weekly AAII Sentiment Survey showed that for the first time since March 29, bullish sentiment is above its historical average. It rose 5.1% to 42% and ends a streak of 20 consecutive weeks below the historical average of 39%. Since this index is a contra-indicator, it has negative implications for the market.
Other indicators are slightly oversold, and Friday’s CBR is telling us that a limited short-term rally could occur early this week.
Some hope for the bulls was provided from a statement by Fed Chairman Ben Bernanke that “there is room for more action on the part of the Fed to shore up growth.” The chairman is expected to talk on Friday at the Fed-sponsored Jackson Hole meeting. And there is continued optimism that the ECB will act to suppress the euro-zone debt crisis.
Technical analysis is telling us that false hopes abound and that the chances are high that in the near and intermediate term, stock prices are headed south.
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.