Non-confirmation Could be Problematic for Stocks

by Sam Collins | July 31, 2012 2:35 am

Following a somewhat higher opening on Monday, stocks sagged when Deutsche Bank (NYSE:DB[1]) downgraded JPMorgan Chase (NYSE:JPM[2]) as a result of its trading losses earlier this year. This was followed by a negative manufacturing report from the Dallas Fed, and stocks failed to recover as investors await the outcome of European Central Bank (ECB) and Fed meetings later this week.

At Monday’s close, the Dow Jones Industrial Average was off 3 points at 13,073, the S&P 500 was up 1 point to 1,385, and the Nasdaq fell 12 points to 2,946. The NYSE traded 657 million shares and the Nasdaq crossed 372 million. Breadth was even on the Big Board, but decliners exceeded advancers on the Nasdaq by 1.8-to-1.

SPX Chart
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By exceeding its July highs, the S&P 500 has technically broken out, although it is still confined to a bull channel. Of all of the charts, the S&P 500’s is the strongest with a strong MACD buy signal and up volume on Friday on the NYSE that surpassed 16-to-1. The Nasdaq’s up volume was much less at just 3-to-1.

Dow Chart[3]

The Dow industrials are equally strong. The index sliced through both the July peaks and the much heralded 13,000 mark with little difficulty. Its MACD also flashed a strong buy signal. 

DJT Chart[4]

But there is “a fly in the ointment,” and that is the Dow Jones Transportation Average. Its lack of follow-through, and a pattern similar to the industrials, leaves the breakout incomplete. 

To Dow theorists, this is a serious problem called a “non-confirmation.” And there are other problems with the transports. Its 50-day moving average cut downward through the 200-day for a sell signal earlier in July, and that signal has not been reversed. And its MACD is still on a sell signal.

Conclusion: U.S. stocks have been very strong with Friday’s breakouts driven by high volume and excellent breadth. But the rally has been the result of new government intervention rather than strong earnings and a healthy economy. And a glaring non-confirmation exists in the Dow complex. 

Investors are awaiting the results of this week’s Fed and ECB meetings for guidance since another round of strong intervention will no doubt drive stocks to new highs. The question now is when and how strong the intervention will be.

It seems to me that the risk of another foul-up by either the ECB or the Fed is high enough for us to stand aside until they sort out their new economic policies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. DB:
  2. JPM:
  3. [Image]:
  4. [Image]:
  5. click here:
  6. click here:

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