On Friday, stocks closed mixed to slightly higher as anticipation grew for another round of easing by the Fed. The view that the Fed could act as soon as this Thursday was fueled by disappointing jobs numbers and led to a rally in the financial stocks.
European markets were broadly higher following the European Central Bank’s approval of a plan to buy bonds in struggling countries. However, representatives of Spain and Italy said that it was unlikely that they would request such purchases due to the economic restrictions that the ECB would impose. And the German Bundesbank voiced its strong disapproval of the plan.
At Friday’s close, the Dow Jones Industrial Average was up 15 points to 13,307, the S&P 500 gained 6 points at 1,438, and the Nasdaq was up fractionally at 3,136. The NYSE traded 678 million shares and the Nasdaq crossed 394 million. Advancers led decliners by 2-to-1 on the NYSE and by 1.4-to-1 on the Nasdaq.
The S&P 500 has broken decisively to a four-year closing high of 1,432. Initial support is now at the April high of 1,419 (close) and the August high (close) of 1,418. Resistance is at the May 2008 high of 1,440.
Bollinger Bands are among the most widely used indicators and are lines drawn at fixed intervals around a moving average. Not to get too technical, but I use a 9-day moving average with 2 standard deviations above and below the average for the visual bands (red). During periods of volatility, the bands move farther away from the average. The closer prices move to the upper band, the more “overbought” the market, and the closer prices move to the lower band, the more “oversold” the market.
Conclusion: There is no contesting the fact that the various indices have “broken out” from the restraining highs of this year and longer. Thursday’s new highs and Friday’s follow-through, as tepid as it was, are technical evidence of a breakout.
For most of the indices, like the S&P 500, the break resulted in a 45-bar new high — another signal that stocks will most likely move higher. Thursday’s break also produced up volume of 14-to-1 on the NYSE and 7-to-1 on the Nasdaq.
OK, that’s the bullish case, now for the “but.” NYSE volume of just 735 million shares on Thursday and a mere 678 million on Friday are very low and alone lead me to question the overall support by institutions of a major break. Also note the widening of the Bollinger Bands, which are very similar to the bands of April, which preceded a major sell-off.
Let’s be clear, the long-term bull trend has never been in doubt, but the near-term trend has changed to “up.” What we are attempting to discern is the strength of the intermediate trend since that is what could carry us through to year’s end.
This headline-driven market is dependent upon QE from the Fed and the ECB for its daily momentum, and these sources are highly unpredictable, and much of the move may have already been discounted. Thus, remaining cautious is prudent.
I would not buy high-volatility stocks and “chase the breakout.” Instead, buy undervalued, high-quality, dividend-bearing stocks that could withstand a correction. Those who have written options on positions in the past two weeks should not disturb them. Shorts should have stop-loss orders in place that will automatically protect them. Traders may want to go to precious metals and financials for quick short-term profits.
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.