The Dow hits an incremental high amid rising volatility >>> READ MORE

Technicals Do Not Bode Well for the Bulls

Several indicators support a failed breakout attempt


Friday ended with a sharp rally following a turbulent week. With the day’s 1%-plus rally, the major indices closed on the plus side for the week.

Two key factors were attributed to Friday’s advance. First was the surprising victory in the U.K. of the Conservative Party, which gained a clear majority in Parliament. The Vanguard FTSE Europe ETF (NYSEARCA:VGK) jumped 2.4%.

Second, U.S. nonfarm payrolls for April beat expectations, showing a modest increase in jobs that analysts said was good but not good enough to be concerned about an interest rate hike in 2015. The unemployment rate fell to 5.4%.

As a result of the jobs report, the price of the 10-year U.S. Treasury note rose, driving its yield down 3 basis points to 2.14%.

All 10 sectors of the S&P 500 participated in the rally with materials, health care and energy in the lead, each up 1.6%. Biotech stocks attracted buyers with the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) advancing 2.3%.

Microsoft Corporation (NASDAQ:MSFT) rose 2.3% following a Reuters report that it is no longer looking to acquire, inc. (NYSE:CRM). CRM fell 2.8%.

Gold for June delivery rose 0.6%, closing at $1,188.90. Light, sweet crude oil settled at $59.39 a barrel, up 0.8%, and spot gasoline futures rose 0.1% to $1.9918 a gallon.

At Friday’s close, the Dow Jones Industrial Average rose 267 points to 18,191, the S&P 500 gained 28 points at 2,116, the Nasdaq jumped 58 points at 5,004, and the Russell 2000 was up 9 points at 1,235.

The NYSE’s primary market traded 776 million shares with total volume of 3.4 billion. The Nasdaq crossed 2 billion shares. On the Big Board, advancers outpaced decliners by almost 4-to-1, and on the Nasdaq, advancers were ahead by 1.7-to-1.

For the week, the Dow gained 0.9%, the S&P 500 rose 0.4%, the Nasdaq lost 0.4 %, and the Russell 2000 rose 0.6%.

Dow Chart
Click to Enlarge

Chart Key

Even though the Dow Jones Industrial Average showed strength on Friday by attacking its March high at 18,289, it was not accompanied by anything close to a new high by the Dow Jones Transportation Average. The transports closed at 8,767 versus a high of 9,310. With the non-confirmation of the industrials’ MACD (descending line), there is a twin non-confirmation now in place.

Russell 2000 Chart
Click to Enlarge

The small caps are severely lagging, and Friday’s low-volume rally almost failed to push the index up for the day. A lower close would have been a clear sell signal. Even so, MACD’s non-confirmation line should be enough to make small-cap buyers hesitate.


The stock market is now in the hands of big-cap buyers, and although there are some technicians who welcome them as “strong money,” my experience has not been favorable.

The exception would be when volume spikes by 2-to-1 above a 12-month norm accompanying a breakout, which is usually a very favorable indicator. But with current volume at about 700 million shares, I foresee another failed attempt at a new high.

There are several indicators that support a failed breakout attempt. These include the Dow Theory non-confirmation and a non-confirmation from the MACD appearing on all major indices. The reverse wedge on the Russell 2000 is a variation of a horn pattern, a very bearish chart formation.

As we enter the most unfavorable time of the year for equity appreciation, it is again time for caution. There are some bargains (e.g., financials, see the Trade of the Day), but the charts are telling us to expect false breakouts.

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,

©2017 InvestorPlace Media, LLC