Traders were looking for a strong opening for stocks on Tuesday, following three days down, and they got it with the Dow Industrials up over 90 points in the first minutes of action. But what many did not anticipate was steady selling for the remainder of the session.
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The opening was helped by news that the European Union (EU) had transferred 14.5 billion euros to Greece. But the euro soon turned south again, plunging to the lowest rate against the U.S. dollar since 1996, on news that Germany had issued a crackdown on naked short selling. And even though the move mirrored the U.S. ban on certain naked shorts last year, it was taken as a sign of more weakness in the EU.
Financial stocks were hit hard with big banks down sharply. The KBW Bank Index (BKX) fell 3.7%, its worst level in over two months.
Even outstanding earnings from Wal-Mart Stores, Inc. (NYSE: WMT) and The Home Depot, Inc. (NYSE: HD) had little effect on the selling. Home Depot fell 2.4%, but Wal-Mart gained 1.85%. The retail group fell 2.5%.
The market was also negatively impacted by gloomy financial news. The producer price index fell 0.1% in April versus an expected increase of 0.1%. However, housing starts for April rose 5.8% to an annualized rate of 672,000 versus an expected 650,000.
At the close, the Dow Jones Industrial Average (DJI) had fallen 115 points to 10,511, the S&P 500 (SPX) fell 16 points to 1,121, and the Nasdaq (NASD) was down 37 points to 2,317.
The NYSE traded 1.5 billion shares with decliners over advancers by over 3-to-1. The Nasdaq traded 715 million shares, and decliners exceeded advancers by just under 3-to-1.
Crude oil for June delivery fell 67 cents to $69.41 a barrel on the decline in the euro versus the dollar. The benchmark contract closed at its lowest level since Sept. 29, 2009. The Energy Select Sector SPDR (NYSE: XLE) fell 53 cents to $55.13.
June gold lost $13.50 settling at $1,214.60 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) lost 1.21 points, falling to 178.75.
What the Markets Are Saying
Monday’s sharp reversal in the closing minutes of trading gave hope to the bulls, especially when they saw stocks open with heavy buying yesterday. But the subsequent crush of steady selling dashed those hopes in a sea of red ink.
Yesterday’s intraday high, achieved early in the day, got within three points of the S&P 500’s next resistance at 1,150. However, by the close, it was not the next resistance zone that was in sight, but the next support line at 1,115 that was in full view.
In addition to the relatively strong, broad-based selling, which itself is a negative indicator, our internal indicators again flashed strong sell signals. And the most watched sentiment index, the CBOE Volatility Index (VIX), hopped up to very near Monday’s intraday high of 33.69, virtually assuring us that there is more turmoil to come.
We’ve been focusing on support and resistance zones for the last several days, which have defined trading since the break lower on May 4. But there are two very important lines of support that traders and investors alike should keep in mind.
The first is the 200-day moving average at 1,103 since it defines whether the overall trend is still bullish. The second number is 1,092, and that number represents the 20-week moving average. The 20-week moving average is watched by many professionals, because for decades it has defined the mark between bear and bull markets.
Currently, the S&P is above both of those marks and will likely remain above them, and if the market holds at current levels, could even trace out a double-bottom and establish a strong base for a move higher later this year.
And these lines, coupled with the clearly defined support/resistance zones, provide the trader with targets for both short and long transactions. A quick and nimble trader can total some handsome day trading gains within these zones.
So, with the major indices now pushing into the support areas that define bull versus bear markets, the long side of the equation seems to offer the best chance of short-term success. But keep your stop-loss orders active, since a close below the 20-week or 200-day moving averages could mark the start of a new bear market.
Today’s Trading Landscape
Earnings to be reported before the opening include: Abiomed, BJ’s Wholesale, Brady, Chico’s FAS, Citi Trends, Deere, Double Hull Tankers, Eaton Vance, Global Sources, Hormel Foods, Polo Ralph Lauren and Yucheng Technologies.
Earnings to be reported after the close include: Advance Auto Parts, Applied Materials, Aruba Networks, Autodesk, Bristow Group, GT Solar, Gymboree, Hot Topic, KongZhong, Limited, Netease.com, Opnext, PetSmart and Synopsys.
Economic reports due: bank reserve settlement, MBA purchase applications, consumer price index (the consensus expects 0%, and 0.1% ex-food and energy), EIA petroleum status report and FOMC minutes.
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