Stocks started the day higher Wednesday as Fed Chairman Ben Bernanke appeared to indicate that the current policy of monthly bond purchases would continue. But as his testimony developed, it became clear that some members were in favor of winding down purchases, and the market responded by closing just above the lows of the day.
Both stocks and bonds sold off in the afternoon following the release of the minutes from the Fed’s latest meeting. In them, some members were in favor of easing off the bond-buying plan even as early as June. No decision was evident, but the minutes, along with recent statements by the Fed’s regional presidents, indicated that the committee is to some extent preparing to end quantitative easing.
At Wednesday’s close, the Dow Jones Industrial Average was off 80 points at 15,307, the S&P 500 fell 14 points to 1,655, and the Nasdaq was down 39 points at 3,463. The NYSE traded 854 million shares and the Nasdaq crossed 530 million. Decliners outpaced advancers on the Big Board by 3.4-to-1, and on the Nasdaq, decliners were ahead by 2.9-to-1.
Wednesday opened higher with prices quickly exceeding the high of the day. But the closing and intraday low were lower than the prior day’s low. This is call a key reversal day (KRD).
To many technicians, a KRD is a kiss of death, but we had one in February on both the S&P 500 and Dow industrials, and the next day the markets reversed on a Collins-Bollinger Reversal (CBR) buy (our proprietary internal indicator) and the bull trend resumed.
Currently, the first support for the S&P 500 rests at its 20-day moving average at 1,627, the next at the April high of 1,597, and then the 50-day moving average at 1,589.
The Dow industrials have a similar pattern to the S&P 500’s with a KRD highlighted. Also note that a KRD, like that on the S&P 500, occurred in February and had no impact on the overall trend.
Immediate support is at the 20-day moving average at 15,055, then the April high at 14,965, and then the 50-day moving average at 14,778.
A simple reversal at the April high led to a 3.4% pullback. MACD is bullish and RSI is only slightly overbought, as it is with the S&P 500.
Conclusion: On Monday, May 13, I said, “What tape action could lead to short-term pullback? The following would cause concern: a “key reversal day”… three straight days down in the Dow industrials (has not occurred yet this year), and/or a high-volume break with volume of 5 times down.”
A KRD can have significance if supported by other negative technical indicators. But none exists. The markets have had an unusually steep ascent from the April lows and are thus subject to some profit-taking. However, the overall trend is so powerfully bullish that any decline should still be viewed as a buying opportunity.
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.