Can the Nasdaq Turn This Bounce Into a True Reversal?

by Sam Collins | April 17, 2014 2:24 am

On Wednesday, stocks rose for the third consecutive day with small- and mid-cap stocks joining the party and helping the S&P 500 into the black for the year. All 10 sectors of the S&P 500 rose.

Better-than-expected earnings led Dow component Intel (INTC[1]) to gain 0.3%. But the star of the big caps was Yahoo (YHOO[2]), which surged 6.3% on higher earnings and an upbeat revenue outlook for the quarter. Bank of America (BAC[3]) fell 1.6% after reporting a Q1 loss.

The Federal Reserve’s Beige Book said that economic activity is rebounding after an unusually rough winter in most areas. Industrial production in March rose 0.7% versus a forecast of 0.4%. Housing starts increased by 2.4% in March to a seasonally adjusted annualized rate of 946,000, but had expected an increase to 955,000.

At the close, the Dow Jones Industrial Average gained 162 points to 16,425, the S&P 500 rose 19 points to 1,862, and the Nasdaq jumped 52 points to 4,086. The NYSE traded total volume of 3.2 billion shares, and the Nasdaq crossed 1.9 billion. On the Big Board, advancers outpaced decliners by 3.8-to-1, and on the Nasdaq, advancers beat by 2.5-to-1.

Nasdaq Chart
Click to Enlarge

Chart Key[4]

The Nasdaq survived a test of its 200-day moving average at 3,946. That’s a strong positive, but can it sustain the bounce and turn it into a true reversal?

There is formidable resistance represented by the wide band from 4,080 to 4,243, as well the 20-day moving average at 4,161 and the 50-day at 4,221. Despite MACD’s turn, the overall formation appears to be a rounding top, and a failure to hold at the 200-day moving average would confirm the top.

RUT Chart
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The Russell 2000’s formation is not quite as ominous as the Nasdaq’s. Here we are faced with a simple breakdown from a correction channel outlined by the dotted lines. The reversal from its 200-day moving average was important. But like the Nasdaq, it has formidable overhead resistance — first the line at 1,132, and then the 20-day and 50-day moving averages.

Conclusion: The charts of the Dow indices covered yesterday[5] are much more positive than the two high-volatility charts we studied today. They, too, have to overcome potential sellers, but if they can pull it off, it would trigger a Dow Theory buy signal and most likely pull the more speculative stocks up with them.

Overall, even though we’ve had several good days, the broad view of the major indices is more negative than positive. Today is a major earnings day, and the hope is that some of the big boys will come through with significant market-moving results. Blackstone Group (BX[6]), General Electric (GE[7]), Morgan Stanley (MS[8]), Goldman Sachs (GS[9]) and Chipotle Mexican Grill (CMG[10]) all report quarterly earnings today, and their earnings could make or break the current rally.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[11].

For a list of this week’s economic reports due out, click here[12].

  1. INTC:
  2. YHOO:
  3. BAC:
  4. [Image]:
  5. The charts of the Dow indices covered yesterday:
  6. BX:
  7. GE:
  8. MS:
  9. GS:
  10. CMG:
  11. click here:
  12. click here:

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