On Friday, markets were encouraged by the happenings in Italy as news spread of the probable resignation of Prime Minister Silvio Berlusconi and the formation of a new government. For the moment, at least, the threat of European debt contagion was put on the back burner and the markets rallied.
The Dow Jones Industrial Average gained 2.19%, the S&P 500 rose 1.85%, and the Nasdaq was up 2.04%. On the NYSE, gainers outnumbered decliners by 6-to-1, and on the Nasdaq, advancers were ahead by 3.6-to-1. Volume on both exchanges was lower than normal due to the banks closing for Veterans Day. The NYSE traded 762 million shares and the Nasdaq traded 419 million shares.
On Thursday, we highlighted the trading ranges for each of the major indices:
- Dow 11,650 to 12,200
- S&P 500 1,220 to 1,275
- Nasdaq 2,600 to 2,725
And we noted that each of the internal indicators was negative and each had failed its second test of the important 200-day moving average. Also noted was the fact that no index had broken its near-term support line, and we concluded that the bears were still in charge.
Friday’s rally did bolster the bulls’ case by turning up from each index’s respective support line, although none has yet produced a clear buy signal. And on the bear’s side we dare not ignore Wednesday’s very negative plunge with a 30-to-1 negative market breadth. Adding more uncertainty is the CBOE Volatility Index’s Friday close at 30.04 — just within the bearish range.
Conclusion: The major indices have been squeezed into a very tight trading zone. Therefore, we should know shortly whether the bear remains in charge or the bull takes a stab at the enormous overhead that confronts him. (Whichever way it goes, you can make money trading options.)
The Daily Market Outlook normally confines itself to issues relating directly to technical analysis. However, with volatility very high there are some important non-technical issues that our readers should consider:
1. The Nov. 23 deadline for the U.S. Congress’ task to find at least $1.2 trillion in deficit reduction measures is rapidly approaching, and many observers think that nothing will be done. If so, that’s a negative, as is a deal that placates and just provides for a bare minimum. The only favorable market reaction might come from a deal with deep cuts, but even that could result in specific sectors to be cut and their stocks to fall.
2. Lord John Browne of EuroPacific Capital (europac.net) warned on CNBC late Friday that a “two-tiered euro” is being worked out byFranceandGermany, and thatFranceis vulnerable to credit-rating cuts. He also stated that rumors persist thatGreat Britainis preparing for such an event by investing in gold and silver ETFs backed by the metals and shorting the equity markets as well as the euro versus the U.S. dollar.
3. Finally, this week brings economic reports that could have significant impact on the markets. For a list of reports due, click here.
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.
