Better Hope This Rally Doesn’t Run Out of Gas

by Sam Collins | June 7, 2012 2:28 am

Wednesday’s opening exploded from the gate on rumors of a general stimulus package from both the European and U.S. central bankers. And many traders who were short, covered in advance of the Fed’s Beige Book, which was released in the afternoon but without much further reaction. A positive comment on the housing stocks stoked the fires there, and the builders had one of their best days in months.

The run on stocks resulted in the best day of the year for virtually all of the major indices. The Dow Jones Industrial Average closed at 12,415, up 287 points, the S&P 500 rose 30 points to 1,315, and the Nasdaq jumped 67 points to close at 2,845. Volume on the Big Board totaled 859 million shares and the Nasdaq traded 456 million. On the NYSE, advancers exceeded decliners by 7-to-1, and on the Nasdaq, advancers were ahead by 4.6-to-1.

Dow Chart
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The Dow has confirmed a reversal by closing above the resistance line at 12,300 and its 200-day moving average. This changes the near-term and intermediate-term trends to sideways from down and sets up the index for an attack on the major breakdown at 12,716.

SPX Chart
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By rallying from its June low on a Collins-Bollinger Reversal (CBR) buy signal and closing above its 200-day moving average, the S&P 500 has halted what had appeared to be a runaway breakdown. Like the Dow, the S&P 500’s near and intermediate trends are now sideways from down.

Note the strong buy signal from the stochastic, which tells us that the buying will probably continue.

Nasdaq Chart
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Like the more senior indices, the Nasdaq reversed on Monday, closing well above its 200-day moving average. It closed Wednesday just shy of its 20-day moving average and still has a major resistance zone at 2,882 to 2,885 to overcome, but the strong stochastic buy is telling us that the buying should continue.

Conclusion: A tradeable rally was expected following the extremely oversold condition of the market. But Wednesday’s confirmation of Monday’s reversals was much more powerful than expected with upside volume at over 10-to-1. Overall volume was slightly higher than normal, but not enough to justify a complete change in trend.

My guess is that the rumors of more easing and a deal between European and American central bankers created a short-covering panic unlike any seen since mid-2011. The rally will likely continue as long as the headlines remain positive, but the intermediate trend is sideways, and if the rally runs out of gas before reaching the major resistance areas noted on each chart, we could see a very nasty test of the lows.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[1].

For a list of this week’s economic reports due out, click here[2].

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