U.S. Stock Market in a Critical Position

Despite bearish overtones, the Dow and Nasdaq held at important technical levels

   
U.S. Stock Market in a Critical Position

On Friday, the Dow Jones Industrial Average rose 1.1%, closing higher for the week, and the S&P 500 gained 1.2% with all 10 of its sectors registering gains.

It was clear that the reason for Friday’s rally was Russia’s order to its troops to pull back from the Ukrainian border. Russia’s defense minister said it had finished military exercises in southern Russia, near the Ukrainian border. But some diplomats warned that Russia could still enter Ukraine under the guise of a “peacekeeping force.”

The leading sectors on Friday were those that took a beating earlier in the week: Utilities gained 2%, consumer staples gained 1%, and health care stocks rose 1.2%. The iShares Nasdaq Biotechnology (IBB) rose 1.4%.

The United States’ decision to bomb ISIS positions on Friday didn’t appear to have much impact on trading. However, President Obama later said the decision to return to Iraq with a limited goal of conducting defensive airstrikes could be a commitment that may last for months.

Nonfarm labor productivity increased 2.5% in Q2 versus an expectation of 1.4%, while unit labor costs rose less than expected.

At Friday’s close, the Dow Jones Industrial Average was up 186 points at 16,554, the S&P 500 rose 22 points to 1,932, the Nasdaq jumped 36 points to 4,371, and the Russell 2000 rose 12 points to 1,131. The NYSE’s primary market traded 628 million shares with total volume of 2.9 billion shares, and the Nasdaq crossed 1.7 billion shares. Advancers exceeded decliners by 3.1-to-1 on the Big Board and by 1.5-to-1 on the Nasdaq.

For the week, the Dow increased 0.4%, the S&P 500 gained 0.3%, the Nasdaq rose 0.4%, and the Russell 2000 gained 1.5%.

08 11 14 dji 300x180 U.S. Stock Market in a Critical Position
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chart key 300x84 U.S. Stock Market in a Critical Position

Friday’s stellar performance by the Dow does not take it out of the woods. However, by holding at the important 200-day moving average at 16,349, it slightly reduces the downside pressure and shifts our attention to the resistance line at the 2013 high of 16,588.

08 11 14 nasd 300x182 U.S. Stock Market in a Critical Position
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Last week, the Nasdaq’s traded in a very narrow range from about 4,324 to the 50-day moving average at 4,379. And even if we broaden the overall range, which is defined by the January closing high of 4,243 and the March high of 4,371, this is still a tight range from which to make a trading decision.

Conclusion

I believe the charts of the Dow (the “generals”) and the Nasdaq (the “soldiers”) represent the critical position of the U.S. stock market. In a perfect world, both indices should move in the same direction; however, traditionally a major move begins and is sustained by the “troops” — the Nasdaq.

A pop above the Nasdaq’s 50-day moving average could put the index on more firm bullish footing, as would a close for the Dow industrials above the 2013 high of 16,588. On the other hand, if the Nasdaq falls under 4,324 and then the January closing high at 4,243, it could result in a test of its overall bull market line as represented by its 200-day moving average at 4,186. A close below the 200-day moving average of the Dow industrials at 16,349 would also create heightened anxiety.

A less tangible, but still meaningful, consideration is the market’s reaction to news, which last week was decidedly negative. And yet both indices held their ground — a very positive indicator.

Additionally, the most relied upon sentiment indicator, the AAII Sentiment Survey, showed a decrease in bullishness again last week. This indicator has consistently hovered in the oversold range since June 12 and indicates that the public is scared stiff — a positive.

The market has bearish overtones, but last week’s ability to hold at critical technical levels in the face of negative news is a positive that can’t be ignored. Remaining cautious while holding cash is the best strategy until the market tells us in more certain terms the direction of its next move. Patience in this situation is a difficult virtue but one that should have its rewards.

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.


Article printed from InvestorPlace Media, http://investorplace.com/2014/08/daily-stock-market-news-u-s-stock-market-critical-position/.

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