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Was the Dow’s 175-Point Jump a False Breakout?

Rally looks suspiciously like end-of-the-month window dressing and short covering


Stocks rallied sharply Wednesday, driving the Dow Jones Industrial Average to a five-year high while other major indices effectively overcame most of Monday’s losses. The rally was attributed to comments made by Federal Reserve Chairman Ben Bernanke that indicated no immediate halt to the central bank’s aggressive easy-money policy. And a solid Italian bond auction help assuage concerns over Europe’s debt crisis.

Strong economic data also helped the markets. January pending home sales rose 4.5%, beating analysts’ forecasts of 1%. And, excluding transportation, durable goods orders rose 1.9%, while 0.2% was expected. With transportation included, the report showed a drop of 5.2% versus an expected drop of 3.5%.

At the close, the Dow was up 175 points to 14,075, the S&P 500 rose 19 points to 1,516, and the Nasdaq gained 33 points at 3,162. The NYSE traded 673 million shares and the Nasdaq crossed 412 million. Advancers were ahead of decliners on the Big Board by 3-to-1, and advancers led on the Nasdaq by 2-to-1.

DJI Chart
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Trade of the Day Chart Key

The Dow industrials made a five-year high Wednesday, but in the process created an odd technical formation called a “horn.” The horn is generally recognized as a bearish formation, and coupled with Monday’s “key reversal day” and a bearish MACD, doesn’t give investors a clear-cut bullish breakout. Combine that with puny volume and you have the possibility of a false breakout.

Nasdaq Chart
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The Nasdaq’s chart shouldn’t encourage the bulls any more than the Dow’s chart. After breaking to a new high at 3,214, the index reversed, plunged through its 20-day moving average (green line), and finally found support at its 50-day moving average, now at 3,116.

Wednesday’s rally challenged the 20-day moving average but failed to close above it. Therefore, the near-term trend is still down. A failure to hold at the 50-day would likely target the index to fall to the gap at 3,021 to 3,083.

Conclusion: Despite Wednesday’s triple-digit Dow jump, there are too many questionable technical characteristics in each of the day’s charts to reach a bullish conclusion.

The false breakout of the Nasdaq is the most disturbing, and Wednesday’s big Dow rally, with upside volume significantly lower than downside volume, looked more like end-of-the-month window dressing coupled with short covering. Unless the indices can attract more upside volume and breadth, it is unlikely that this rally can be sustained.

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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