Dow Issues New Buy Signal

by Sam Collins | August 17, 2012 6:21 am

On Thursday, stocks rose with the Dow scoring its biggest advance since Aug. 3, following comments from German Chancellor Angela Merkel that she wishes to hold the euro zone together. An increase in housing permits and an initial claims report that met forecasts also helped stocks break from the current tight trading range with technology stocks leading the way.

At Thursday’s close, the Dow Jones Industrial Average was up 85 points to 13,250, the S&P 500 gained 10 points at 1,416, and the Nasdaq rose 31 points to 3,062. The NYSE traded 595 million shares and the Nasdaq crossed 456 million. Advancers were ahead of decliners by about 2-to-1 on both exchanges.

Dow Chart
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Trade of the Day Chart Key

The Dow’s close Thursday was just 29 points below the annual high of 13,279 established on May 1, and is only 15 points from the April closing high. The stochastic gave a new buy signal Thursday, even as the intraday high bumped against the bullish trendline of the index.

UUP Chart
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The reason for Thursday’s advance is clear: The U.S. dollar declined slightly. This inverse relationship is so sensitive that a move by the euro to $1.2356 from $1.2289 caused the major indices to come very close to new annual closing highs.

Conclusion: Certainly “price action trumps all,” as one of our readers put it. Even as the master traders on the exchanges’ floors are stymied by the recent rally, small amounts of buying continue to offset sales.

The “wall of worry” bricks include recent large sales of bonds, and yet volume on the world’s exchanges is very low. Another row of bricks could be laid by the central banks. Amid the global anticipation of more action by the Fed, Thursday’s Wall Street Journal contained an article titled, “Fed Hawks Speak Out Against QE3.” And another article talked of the CBOE Volatility Index (VIX) “fear gauge” scraping along the bottom of complacency — a sign that a “market tumble” is ahead.

And, yes, I have been very cautious since one overnight announcement could blast prices in either direction. Thus, long-term investors should remain in stocks, but traders should be cautious.

Consider the conclusion of the Wall Street Journal’s article on the VIX: “After all, a month from now we will know much more about the fates of Greece, Spain, and Syria, the odds of further extraordinary Federal Reserve action and how the U.S. presidential race is shaping up into the home stretch.”

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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