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Charts Offer Hope a Major Correction Can Be Avoided

Both the industrials and transports recovered their 50-day moving averages


Stocks ended higher for the second consecutive day, but it was also the second day of high volatility. The S&P 500 advanced with all 10 sectors gaining. And the Nasdaq closed higher following a reversal from its 200-day moving average.

Stockholders are focused on earnings, and Dow component Coca-Cola (KO) rewarded them with Q1 revenues that were slightly above forecasts, while earnings met expectations. The stock jumped 3.7%. And Johnson & Johnson (JNJ) rose 2.1% following better-than-expected Q1 earnings and a higher forecast for the year.

But following a big jump on the opening, the indices took an equally big hit when the New York Federal Reserve’s Empire State manufacturing index for April was announced. The index fell to 1.3 from 5.61 in March, compared with expectations of a rise to 8.0. And homebuilder confidence was not as strong as anticipated. The April NAHB/Wells Fargo Housing Market index rose to 47, but an increase to 50 was expected.

News from the Ukraine also had an impact on stocks. Tension there intensified as fighting reportedly broke out at an airbase in eastern Ukraine. The airfield was reported to be taken by the Russians but then retaken by the Ukrainians.

At Tuesday’s close, the Dow Jones Industrial Average rose 89 points to 16,263, the S&P 500 gained 12 points at 1,843, and the Nasdaq gained 11 points at 4,034. The NYSE’s primary market traded 15.9 million shares with total volume of 3.7 billion shares. The Nasdaq’s total volume was 2.4 billion shares. On the Big Board, advancers outpaced decliners by 1.6-to-1, but on the Nasdaq, decliners exceeded advancers by 1.1-to-1.

Dow Chart
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Chart Key

The Dow industrials closed above its 50-day moving average after closing below it in the three prior sessions. That failure was significant in that, by setting a short-term low, the index registered a “non-confirmation” under Dow Theory — a negative event that has sometimes led to total market reversals.

DJT Chart
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Following its late-March triple-day high, the Dow Jones Transportation Average headed south and broke its 50-day moving average. This established a short-term change of trend, and along with the industrials’ breakdown, appeared to confirm a general collapse of blue chips.

Conclusion: Many technicians will focus on Tuesday’s high volatility and the ability of the Russell 2000 and Nasdaq to hold above their 200-day moving averages. And that is excellent news.

But of even greater significance, from a technical viewpoint, is the upturn in the Dow industrials and transports. It was their failure, or non-confirmation of the Dow indices, that appeared to confirm that the more volatile stocks were about to go into a deep slide.

With the close of the two major Dow indices above their 50-day moving averages, both have slipped into a narrow sideways trend, restoring the possibility that the market’s latest volatile decline was only an adjustment and not the beginning of a major “correction.” And with the recovery of major inflection points on both of the Dow charts and the S&P 500’s chart, there is a possibility of a trend shift to the upside.

Only time will tell if Tuesday’s action turned the tide, but in a shortened week, it is now possible that volume will fall and a base will be formed within the current trading zone of each index.

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.

Article printed from InvestorPlace Media,

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