The Real Dow Number to Worry About

On Friday, the euro slid to a 16-month low as rumors of sovereign-debt downgrades plagued the world’s market, while U.S. markets were impacted by both Europe’s problems and disappointing results from a key banker – JPMorgan Chase (NYSE:JPM). 

On Monday, the euro traded unchanged against the U.S. dollar, but investor confidence was clearly shaken by S&P’s downgrading of Europe’s rescue fund to AA+ following a late downgrading of France and Austria’s AAA rating. S&P also cut ratings on seven other eurozone countries, including Italy. The euro was at $1.2673 midday in New York versus Friday’s close at $1.2677.

Despite the apprehension over Europe, the U.S. markets did comparatively well on Friday with the Dow Jones Industrial Average off 49 points closing at 12,422, the S&P 500 off 6 points at 1,289, and the Nasdaq down 14 points to close at 2,711. But for the week, the Dow industrials gained 0.5%, the S&P 500 rose 0.9%, and the Nasdaq was up 1.4%. The NYSE traded 827 million shares Friday, and the Nasdaq crossed 448 million. Decliners were ahead of advancers by about 2-to-1 on both exchanges.

UUP Chart
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Trade of the Day Chart Key

Friday the 13th turned out to be a rough day for the euro and a strong day for the dollar. By crushing the December high and gapping on Friday, the path for the dollar is higher.

The next area of resistance is at $23 to $23.50 on the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP). This area corresponds roughly to the $1.23 exchange rate, but the often mentioned downside target for the euro is $1.20. And so despite the overbought condition, it appears that the dollar is headed much higher.

DJI Chart
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Friday’s morning’s opening was weak and looked like the beginning of a test of the recent breakout as stocks fell sharply on poor earnings from JPM and Bank of America (NYSE:BAC). But 10:30 a.m. marked the low of the day, and as the dollar strengthened, curiously so did stocks. By the close, the Dow had gained 111 points from the morning low and closed off by just under 50 points.

The low of the day found support at a mere 11 points higher than the support line at 12,300, which represents the low point of the new bullish trading range at 12,300 to 12,800. The zone below it, 11,800 to 12,300, is a support zone that must hold if the intermediate uptrend is to remain healthy. 

I enjoy reading Jeffrey Saut’s Investment Strategy pieces. Last week, he told of a meeting with Wall Street legend, Lucien Hooper, when Hooper said, “Forget all the noise you hear about the January Barometer. That being, ‘so goes the first week of the new year, so goes the month and so goes the year.’ Institutions can manipulate prices for a short period of time, especially during a holiday-shortened week with a limited audience. “Consequently, pay much more attention to the December low. That would be the lowest closing price for the INDU during the month of December. If that low is violated during the first quarter of the New Year, watch out!”

Watch out we will, Lucien. I’ve highlighted that low at 11,766.26. Let’s hope that this is the only time that we will need to refer to it.

If you’re looking for help making profitable trades, you may want to check out my colleague Joe Burns.

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.

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