Nail Down Profits if Markets Rallies This Week

News from Europe could result in another pop in stock prices

By Sam Collins, InvestorPlace Chief Technical Analyst

The Dow industrials ended last week with consecutive triple-digit gains that pushed the index over 13,000 for the first time since May. This was the fifth triple-digit move in six sessions, and was the result of European Central Bank (ECB) Chairman Mario Draghi’s announcement that the ECB would do “whatever it takes” to keep interest rates low. The ECB meets on Thursday, and many expect that it will put some meat on the bones of Draghi’s aggressive comment.

At Friday’s close, the Dow Jones Industrial Average had gained 188 points at 13,076, the S&P 500 rose 26 points to 1,386, and the Nasdaq jumped 65 points to 2,958. The NYSE traded 912 million shares and the Nasdaq crossed 536 million. On the Big Board, advancers beat decliners by over 5-to-1, and on the Nasdaq, advancers were ahead by 3.4-to-1. For the week, the Dow gained 2%, the S&P 500 was up 1.7%, and the Nasdaq rose 1.1%.

UUP Chart
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 Trade of the Day Chart Key









European headlines again dominated the currency markets, as well as stock markets, last week leaving a trail of chaotic trading. The PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) chart illustrates the high volatility that prevailed in the international currency markets.

For example, we anticipated that the upward gap at $22.57 to $22.78 would be closed, and on Thursday, it was partially closed, but by a surprising downside gap from $22.97 to $22.79. UUP is still solidly in a bull channel, but the daily fluctuations are wild. On Friday, it flashed a stochastic sell indicating that the dollar will fall again this week.

SPX Chart

 The relationship of lower U.S. dollar equals higher stocks reasserted itself, and the S&P 500 enjoyed its highest close since May 4. Volume and breadth picked up but are not at the pace expected from a major breakout. But the balance of up volume versus down volume on the NYSE jumped to 16-to-1 in favor of the bulls, and the S&P 500 issued a new MACD buy signal. Both are strong indications that this week stocks will attempt to break the closing high of May 1 at 1,406.

Conclusion: The focus is again onEurope. Last week’s gains were the result of positive headline news from the ECB and not earnings fromU.S. stocks. This week will not be any different. With an ECB meeting on Thursday, the market is anticipating thatEurope’s central bank will attempt to lower rates for its smaller troubled members.

An aggressive stance to back the ECB by Germany could result in another pop in stock prices. However, the Fed’s meeting on Wednesday is not expected to produce much, and the unemployment number on Friday could be weak. Thus, if we get a headlines-empowered surge early this week, we should nail down profits and wait to see if the Fed and the jobs numbers support the rally. 

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.

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