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Expect This Short-Covering Rally to Fail

With low volume and mediocre breadth, the market will probably turn down prior to making a serious attack on resistance


On Wednesday, the Dow Jones Industrial Average had its best day in five weeks, following the Fed’s Beige Book survey of regional economic growth that showed a “modest to moderate” pace in July and August. Results were enhanced by a sharp increase in sales by both domestics and foreign automakers.

Ford Motor (F), our Trade of the Day, rallied following its best sales report in seven years. Boosting optimism over the report, the company announced an increase in its Q4 production schedule and the stock jumped 3.5%.

The gains in the market held despite a late-day approval by the Senate Foreign Relations Committee of support for the president’s plan for a U.S. military strike on Syria.

At Wednesday’s close, the Dow Jones Industrial Average gained 97 points at 14,931, the S&P 500 gained 13 points at 1,653, and the Nasdaq jumped 36 points to 3,649. The NYSE traded 724 million shares and the Nasdaq crossed 444 million. Advancers led decliners on the Big Board by 2.4-to-1 and on the Nasdaq by 1.9-to-1.

Nasdaq Chart
Click to Enlarge

Chart Key

The Nasdaq’s 36-point rally drove it to the top of a channel and through its 20-day moving average. It also turned the short decline up from the support of the 50-day moving average — all strongly positive for this index.

RUT Chart

The small-cap Russell 2000 index failed to successfully pierce either its 50-day moving average or the 20-day. It also faces considerable resistance at the line at 1,045, which it gapped down from early in August. The MACD is oversold but appears to lack the clear upturn of the Nasdaq’s MACD.

Conclusion: Despite a better performance from the mid-cap stocks on the Nasdaq, the small caps are lagging. And even though the Dow, which represents the large-cap blue chips, had a good day, it failed to make headway against significant technical barriers.

What appears to be just a short-covering rally (low volume and mediocre breadth) will probably fail prior to making a serious attack on the massive resistance illustrated on Wednesday’s chart of the Dow industrials.

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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