Can Fed Prop Up a Market That Is Rapidly Breaking Down?

by Sam Collins | July 25, 2012 2:37 am

Stocks fell again on Tuesday, as worries over Greece’s ability to pay its debts dominated trading. At 2:30 p.m., the Dow industrials were off 200 points. A late afternoon rally, spurred on by a Wall Street Journal report that the Fed is moving closer to QE3, salvaged much of the decline, but the Dow still suffered its third consecutive triple-digit decline.

At Tuesday’s close, the Dow Jones Industrial Average was off 104 points at 12,617, the S&P 500 fell 12 points to 1,338, and the Nasdaq was off 27 points at 2,863. The NYSE traded 807 million shares and the Nasdaq crossed 471 million. Decliners outpaced advancers by about 2.7-to-1 on both exchanges.

Recently, we’ve studied the Dow series of charts, the S&P 500 and Nasdaq for clues as to where the market is headed. Now we’ll look at the NYSE Composite, which is one of the most reliable broad-based indices. It is composed of all of the stocks traded on the New York Stock Exchange.

NYSE Chart

Trade of the Day Chart Key

Note the red-dash downtrend line and the “secondary support line,” which form the triangle that also appears on the other charts. But the Composite also has a major bullish support line drawn from the November low to the June low. This line is its intermediate support line.

MACD issued an intermediate sell signal Tuesday, confirming a sell issued by the 50-day moving average as it crossed through the 200-day moving average a couple of weeks ago. And on Monday, the index closed below the 200-day moving average on a downward gap.

VIX Chart[1]

On Tuesday, the CBOE Volatility Index (VIX) closed above its 50-day moving average for the first time since early June. VIX is a contra-indicator, so this is bearish news.

UUP Chart

This weekly chart of the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP[2]) usually moves counter to stock prices. Thus, a higher U.S. dollar has resulted in a lower stock market.

The longer-term trend of the dollar is down. That makes sense because we are in a bull market in stocks. But the intermediate trend in the dollar is up, and this week, we broke to another new high in the buck. The major bearish resistance line on UUP intersects at about 24, which translates into a dollar at just under 1.20 euros.

Conclusion: Despite rumors of Fed action, which could boost stocks, the charts tell another story. The broad-based NYSE Composite is in a short-term downtrend and appears on the cusp of issuing an intermediate-term sell by breaking the secondary support line. Its MACD and moving averages recently warned of a change in trend. The VIX is also telling us to expect lower stock prices, as is the strong dollar.

After the close Tuesday, the widely held Apple (NASDAQ:AAPL[3]) plunged, following an earnings miss due to falling iPhone sales. It is clearly time to stand aside and be patient. The bull market is intact, but high volatility could create a unique buying opportunity.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

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  2. UUP:
  3. AAPL:
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  5. click here:

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