Government-Induced Rally is Fragile

by Sam Collins | July 27, 2012 2:27 am

On Thursday morning, stock indices gapped up in response to much higher equity prices in Europe. The run on European stocks resulted from comments by European Central Bank (ECB) President Mario Draghi that the ECB is “ready to do whatever it takes to preserve the euro.”

The implication is that the ECB is willing to follow the path of the Fed and embark on “quantitative easing.” The spike in the euro drove oil and gold higher as the U.S. dollar fell and the euro closed at a two-week high. Spain’s 10-year bond fell to 6.93% from over 7% the day prior, andI taly’s 10-year bond fell to 6.06%.

On this side of the pond, the Dow Jones Industrial Average rose 212 points to 12,888, the S&P 500 gained 22 points at 1,360, and the Nasdaq rose 39 points to 2,893. Volume on the Big Board totaled 896 million shares and the Nasdaq traded 504 million. On the NYSE, advancers exceeded decliners by 3.7-to-1, and on the Nasdaq, advancers were ahead by 1.9-to-1.

SPX Chart
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Trade of the Day Chart Key




After Thursday’s “bank bounce,” the uptrend in the S&P 500 is still intact. Resistance now rests at the July highs of 1,375 and 1,380, following a successful reversal from the lower support line of the bull channel and the 50-day moving average at 1,333.

Dow Chart

The Dow has also survived a test of the lower trendline and its 50-day moving average. But the uptrend, like the S&P 500’s, is tenuous. Support rests at its 50-day moving average at 12,613 and the 200-day moving average at 12,552. In order to break from its bull channel it must close over the two July highs at 12,944 and 12,943. Its MACD indicator is close to issuing a buy signal, but Thursday missed it by a fraction.

Conclusion: Both the Dow industrials and the S&P 500 have succeeded in maintaining a well-defined trading zone called a “bull channel.” Each is holding to a series of higher highs and higher lows, and each rally has been sharp but with flat volume compared to the declines from their resistance lines.

Thursday’s advance was the result of the statement from the ECB that it is “ready to do whatever it takes to preserve the euro.” Government-induced rallies have a tendency to be fragile, and Thursday’s statement almost sounded as if it originated from our Fed. Unless the market is able to break to new highs without such government interference, it is best to remain cautious.

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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