By noon Wednesday, the Dow Jones Industrial Average had fallen almost 190 points from Monday’s close, but it turned sharply higher in the afternoon. And when the closing bell rang, most of the leading indices had made it back to breakeven.
The early morning decline came following worries thatGreecewas about to pull out of the eurozone. The afternoon reversal resulted from rumors of a new euro bond issue as a solution to the Greek problem.France, Spain and Italywere said to be pressuring the Germans to consider such a plan, but there has been no response from Berlin.
Nevertheless, the rumor turnedU.S.stocks higher and the Dow closed at 12,496, off only 7 points. The S&P 500 gained 2 points to close at 1,319, and the Nasdaq rose 11 points to 2,850. The NYSE traded 862 million shares and the Nasdaq crossed 523 million. On the Big Board, advancers led decliners by 1.5-to-1, and on the Nasdaq, advancers were ahead by 1.2-to-1.
Wednesday afternoon’s rally was impressive but only because of the number of points recovered as the Dow rallied from its intraday low of 12,312. We’ve been expecting a rally fueled by rumors of a European settlement and a panic of short covering — and yesterday we got it. The Dow found support at on Thursday’s intraday low of 12,309 and the support line at 12,300. And the stochastic supported the rally with a buy signal on Thursday.
However, despite the rumors of a European settlement, the U.S. dollar rose sharply against a basket of currencies and the euro failed to recover. Upside volume for the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) has been increasing since its breakout several weeks ago and that rally continues.
The overall chart pattern of 2012 is similar to that of 2011. The difference between the two is that last year’s triple-top took almost five months to form, while this year’s pattern has formed in just three months. And since this year’s pattern is not yet complete, it is possible that stocks will hold at the 200-day moving average. But note that this year’s channel trend (light red dash line) and neckline have been broken, and that’s a bearish sign.
Conclusion: May has not been kind to stockholders — remember the infamous “Flash Crash” that began on May 6, 2010. Last year’s triple-top ended in a dramatic sell-off that lasted until October. This year, the overall intermediate pattern is bearish with each of the major indices having broken significant support zones.
Yesterday’s rally appears to be nothing more than a rush to cover by the short sellers on the rumor of another new deal in Europe. And more rumors will likely hit the news that could result in more quick rallies that ultimately fail. Intermediate-term and short-term traders should sell into these headline-driven rallies.
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.
