Thursday’s Rally Could be a Bull Trap

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Stocks rallied on a broad front Thursday following the European Central Bank’s (ECB) decision to buy a total of E60 billion ($69 billion) a month in debt securities issued by European institutions and private-sector bonds. Earlier in the week, Japan and China introduced stimulus efforts of their own.

Thursday’s rally was led by the Russell 2000, up 2.1%, which has lagged the other major averages in recent weeks. The S&P 500 gained 1.5%, and the Nasdaq rose 1.8%. Germany’s DAX Index added 1.3%, and France’s CAC 40 was up 1.5%.

The euro fell to $1.1369 against the U.S. dollar, an 11-year low.

FactSet reported that with 66 companies of the S&P 500 having reported earnings, the index is on pace to return less than 0.1% earnings growth and 0.6% sales growth.

Verizon Communications Inc. (VZ) reported a loss for Q4, which was expected, and the stock fell 0.9%. Union Pacific Corporation (UNP) rose 4.8% following better-than-expected earnings.

The financial sector reclaimed some lost ground with a 2.5% rally but is still down 2.8% for the year.

Thursday was a “risk-on” trade compared to the balance of January. Defensive stocks took to the sidelines. Telecom services were off 0.7%, and utilities fell 0.4%. Health care was an exception gaining 1.2%.

Gold rose 0.7% and silver was up 0.8%. Crude oil fell 3.1% to settle at $46.31 a barrel.

At the close, the Dow Jones Industrial Average gained 260 points at 17,814, the S&P 500 rose 31 points to 2,063, the Nasdaq gained 83 points at 4,750, and the Russell 2000 jumped 24 points to 1,190.

The NYSE traded total volume of 4.1 billion shares, and the Nasdaq crossed 1.9 billion. On the Big Board, advancers outpaced decliners by 3.6-to-1, and on the Nasdaq, advancers led by 2.7-to-1.

MDY Chart
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Chart Key

The SPDR S&P MidCap 400 ETF (MDY) reversed from its 200-day moving average and blasted through the former resistance line (now support) at $262. However, falling volume on an advancing day, despite a MACD buy signal, is suspicious. Until MDY breaks through the December high at $268.67, the trend is still sideways.

IWM Chart
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The iShares Russell 2000 Index (ETF) (IWM) is not as strong at MDY. It has faltered at the $118.50 to $119.50 resistance band, and although MACD is turning up, it has not rendered a buy signal. Like MDY, volume on buying days is lower than selling days, which is not a favorable sign.

Conclusion

Both the mid-cap MDY and small-cap IWM, which exactly reflect the patterns of their underlying indices, have yet to break the immediate overhead resistance. A pattern of non-confirmation occurs when less volatile indices, like the Dow utilities, make a new high and more volatile indices, like MDY and IWM, fail to follow. It is a negative signal.

The move to initiate a QE program in Europe is a positive. But with Greece in turmoil and about to elect Europe’s first left-wing government, and the pattern of a rally whenever a central bank eases, Thursday’s rally may be just a short squeeze and another bull trap.

One sparrow does not make a spring, and one rally in reaction to the ECB easing does not make a bull market. We will wait this one out.

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, https://investorplace.com/2015/01/daily-market-outlook-thursdays-rally-bull-trap/.

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