A strong opening yesterday quickly gave way to a round of sustained selling that resulted in losses for the major indices. The positive opening resulted from optimism regarding a solution to Greece’s debt problem. But disappointing economic data and a few earnings misses led to a technical failure to follow through from Wednesday’s gains.
The Dow Jones Industrial Average rose to within reach of its May 2008 high, but by the close it had given up over 100 points from the opening high to fall 22 points for the day, closing at 12,735. The S&P 500 lost 8 points at 1,318, and the Nasdaq fell 13 points to close at 2,805. The NYSE traded 865 million shares and the Nasdaq crossed 508 million. On both exchanges decliners were slightly ahead of advancers.
Resistance lines like the top of the trading range at 12,800 on the Dow industrials is often difficult for buyers to overcome on their first attempt — especially when it represents a new high or close to a new high. The reason for this is that those buyers who entered the market from April to July for a quick trade found themselves under water for six to nine months and can finally get out with a small profit or at breakeven. It will take time to “eat through” the supply of stock from those early buyers. Yesterday’s “key reversal” is characteristic of the failure of the first genuine attempt at a breakout.
Yesterday, the same sell signal, the “key reversal,” also hit the S&P 500. This signal occurs when a stock or index reaches a new intraday high but turns and closes lower than the close of the previous bar.
This is a minor reversal formation, but it tells us to be careful and not chase the market at current prices. This signal, along with the overbought MACD and the overbought RSI, shown yesterday, confirm that now is not the time to load up on stocks.
The U.S. dollar fell slightly yesterday but almost reversed, with the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) closing just 1 point lower. The dollar headed lower chiefly because of a jump in jobless claims and durable goods orders. And, on Wednesday, the Fed said that rates were likely to remain low until late 2014, which reduces the appeal of the greenback to international investors.
But while there has been a direct inverse relationship between the dollar and stocks and commodities, that relationship may break, especially if the economy continues to improve.
Conclusion: Yesterday’s failure by the major indices to break to new highs is probably an indication that prices are headed lower — but it is NOT a signal that the advance is over. We may get as much as a 5% pullback, and if so treat it as an opportunity to buy. All indications are that the stock market will break to new highs following a short consolidation.
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.
