Two key headlines had an impact on U.S. stocks yesterday. First, the Fed, after identifying Europe’s problems as a major risk to the U.S. economy, took no immediate actions. Second, retail sales data grew less than expected in November despite a recent jump in consumer confidence.
And so even though we were focused on the Fed’s report, it turned out that Europe became a greater concern to Fed members. They even cautioned that a “return to more-sluggish growth is likely, particularly with a recession brewing in Europe.”
Many expected Chairman Bernanke to announce a new type of QE3, but when that didn’t occur the markets went into a nose dive. The Dow Jones Industrial Average fell 0.55%, the S&P 500 lost 0.87%, and the Nasdaq was down 1.26%.
Volume was again low with the NYSE trading 926 million shares, and the Nasdaq crossing 487 million shares. Breadth was negative on both exchanges. Decliners on the NYSE outnumbered advancers by 1.5-to-1, and on the Nasdaq, decliners were ahead by over 3-to-1.
The Nasdaq, the index that has consistently been the market leader, both up and down, broke the support line at its 50-day moving average and fell from a two-week trading range. It also sliced through the psychologically important line at 2,600 and received a sell signal from the stochastic.
The last time that the Nasdaq violated these support lines was in November when it plunged to 2,450. Now that mark provides the support point for the bottom of a triangle with resistance at around 2,650 and support at 2,485. Thus, 2,485 to 2,500 is the next target following yesterday’s serious breakdown.
The PowerShares US Dollar Index Bullish Fund (NYSE:UUP) has been in our focus for months as a primary indicator of near-term moves. Yesterday’s break through a triple-top on a positive buildup in volume is a negative indicator for U.S. stocks. The only remaining barrier is October’s high at $22.62.
But as close as the former top is to yesterday’s close, short-term traders would be wise to wait for a break through $22.62 since a reversal down from $22.57 could evolve into a double-top. Be cautious, but strike fast on the short side if the former high gives way.
With big downside momentum in stocks, especially the Nasdaq, it is unusual for the CBOE Volatility Index (VIX), to fall to a level of “unconcern.” The Fed made no indication of a QE3 infusion of new funds into the market. And most Fed observers think that if it comes it won’t be until late Q1 2012. But the VIX is telling us that either central governments are still working on an infusion or traders have taken off for the holidays.
Conclusion: The breakdown of the Nasdaq makes the bears dance, but the lack of follow-through by the Dow industrials, a close by the S&P 500 just over its 20-day and 50-day moving averages at 1,224, and the unusually calm VIX number are indications that traders should hesitate before taking a strong bearish position.
Is this a bear trap in the making or a wounded bull? We should know shortly. (But if you are looking for fast profits, check out my colleague John Jagerson who turned a 67% profit overnight last week.)
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.
