There was no corporate news to account for yesterday’s push through the S&P 500’s resistance zones. The morning was quiet, but by noon stocks were trading modestly higher and began to pick up just before President Obama’s town hall meeting.
The pickup in buyers just prior to the start of the CNBC televised meeting was attributed to an announcement by the National Bureau of Economic Research that determined that June 2009 marked the end of the recession that began in December 2007. And some commentators also attributed the buying to an admission by the president that Republicans would likely regain control of the House of Representatives in the upcoming November elections.
Homebuilders had a strong day with Lennar Corporation (NYSE: LEN) up 8.4% due to its return profitability. Home Depot, Inc. (NYSE: HD) gained 2.5%, and American Express Company (NYSE: AXP), the lead gainer in the Dow, rose 4.2%. Of the 30 Dow stocks, only one, Cisco Systems, Inc. (NASDAQ: CSCO), closed lower.
Foreign markets were strong, which led to a pullback in the U.S. dollar. Moody’s Investors Service retained a rating of a stable outlook for the UK, saying that the country’s current AAA rating should hold as long as the country’s fiscal consolidation plan stays on target.
The demand for U.S. Treasury notes was mixed with the two-year note flat and the 10-year note up. The 10-year’s yield fell to 2.7%.
At the close, the Dow Jones Industrial Average rose 146 points to 10,754, the S&P 500 gained 17 points to 1,143, and the Nasdaq gained 40 points to 2,356.
The NYSE traded 955 million shares with advancers over decliners by a ratio of 4.4-to-1. The Nasdaq exchanged 578 million shares with advancers ahead by 3.8-to-1.
Crude oil for delivery in October rose $1.38 to $75.04 a barrel. The Energy Select Sector SPDR (NYSE: XLE) closed at $54.80, up 91 cents.
September Gold gained $6.40, closing at $1,282 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 2.67 points, closing at 194.35.
What the Markets Are Saying
Two items appear to have fueled yesterday’s break above the summer highs. First is the weakness of the dollar, which makes our products cheaper abroad. And the second is the likelihood that Republicans will win the House of Representatives. In the past, markets have usually done well in times of split houses of Congress, and yesterday several commentators attributed the break to that reason alone.
But, from a technical analysis standpoint, did the major indices break out yesterday? And if so, what is the target for such a breakout?
First, there is little doubt that the summer trading range of S&P 1,040 to 1,130 was broken yesterday with the closing high of 1,142. But some analysts, including S&P’s Mark Arbeter, are now saying that yesterday’s break is also an “inverse head-and-shoulders” formation with a target of 1,233.
Just like the “regular” head-and-shoulders (SHS) formation has very clearly defined specifications that must be met before that formation may be certified, the inverse head-and-shoulders formation also has specifications that must be met.
The June 30 Daily Market Outlook laid out the rules for the “regular” SHS and our readers may remember that I was adamant that all of those specifications were never met. Thus, the “breakdown” of June 30 to July 6, though jarring, could not be counted on to yield the targets that many technicians erroneously concluded would result from the simple break of the S&P 500’s support line at 1,040, and the break became a “bear trap.”
Now, here are the requirements for an inverse head-and-shoulders, taken from “The Technical Analysis of Stock Trends” by Edward and Magee.
1. The left shoulder is made with more or less extensive downside volume.
2. The head is the second decline that carries lower than the left shoulder with somewhat lower volume than the left shoulder.
3. The right shoulder is the third decline and with decidedly lower volume than either the left shoulder or the head.
4. Finally, an advance on which activity (volume) increases notably, which pushes up through the neckline and closes above it by an amount approximately equivalent to 3% of the price, with a conspicuous burst of activity attending this penetration. This is the “confirmation” or “breakout.”
There are currently several requirements that have not yet been attained by the current “breakout,” so we are not able to identify yesterday’s rally as a “reverse head-and-shoulders.” I want to bypass the question of volume on the left shoulder and head since volume throughout the summer has been lacking.
The first requirement missing is volume on the breakout, which yesterday was a mere 955 million shares on the NYSE. Second, the break has yet to reach the 3% advance above the neckline needed for a confirmation. That number is 1,163 on the S&P and a drive to the middle of next resistance zone now at 1,153 to 1,170.
There will be much discussion of the current breakout, but for now the pop higher merely changes the direction of the intermediate-term trend to up from sideways. The long-term trend is still down, so advances of this nature should be treated as rallies in a bear market until proven otherwise.
Today’s Trading Landscape
Earnings to be reported before the opening include: AutoZone, Carnival, ConAgra and FactSet.
Earnings to be reported after the close include: Adobe Systems, Analogic, Cintas, Darden Restaurants and Progress Software.
Economic reports due: ICSC-Goldman Sachs store sales, housing starts (the consensus expects 550,000), Redbook, and FOMC meeting announcement (the consensus expects the discount rate to stay at 0% to 0.25%).
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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