Wednesday’s mixed close was primarily due to a disappointing earnings report from Apple (NASDAQ:AAPL), which closed 12.4% lower. But despite the impact of Apple’s stumble, the Dow Jones Industrial Average rose for the fifth straight day and posted its fourth consecutive multi-year high.
The Dow industrials reacted positively to a better-than-expected jobless report. New applications for jobless benefits fell to 330,000, which is the lowest level of claims in five years. And U.S. manufacturing rose to 56.1 in January from 54 in December, its strongest showing since March 2011.
At Wednesday’s close, the Dow Jones Industrial Average gained 46 points at 13,825, the S&P 500 was breakeven at 1,495, and the Nasdaq fell 23 points at 3,130. The NYSE traded 678 million shares and the Nasdaq crossed 443 million. Advancers led decliners by about 1.3-to-1 on both exchanges.
Unlike the major indices, which have broken clear of important resistance zones, the Nasdaq has lagged. The index may be heavily influenced by the failure of Apple, but it is so sluggish that it is in peril of a correction.
MACD is very close to issuing a sell signal, and it not only has failed to break to a new high, but even struggles to overcome the October high at 3,171. If a correction occurs, look for a pullback that closes at least half of the open gap from 3,021 to 3,084.
The Russell 2000 small-cap index made a clear break on an explosive opening on Jan. 2. Since then, it has followed through with a string of advances but now appears to be tiring as its MACD indicator is rolling over and, like the Nasdaq, could flash a short-term sell signal. But, unlike the Nasdaq, its retreat is limited to around 880, which is a small percentage pullback.
The chart of the midcap S&P 400 index is similar to the Russell 2000 chart except that its MACD indicator is not so overbought. The gap created when it broke free from the four-month consolidation on Jan. 2 is a breakaway gap. This type of gap is most often not covered on a pullback.
Conclusion: The stock market exploded on Jan. 2 with a broad-based breakout that was sustained by greater-than-average volume. But after three strong weeks, the underpinnings of the rally are beginning to weaken as noticed by our internal indicators. Momentum (not shown) is sagging and so is the MACD indicator and the stochastic.
Traders might consider holding back on new positions for several days to allow the recent gains to consolidate before adding a new leg up. But don’t hesitate too long since this rocket may be just coasting until its next stage kicks in.
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.