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Market Finally Reveals Its Direction

Traders should revert to bearish strategies, but timid investors will lose

Stock markets fell Friday due to disappointing earnings, the possibility of Greece’s withdrawal from the eurozone and tightened regulations on margin lending in China.

U.S. Treasury Secretary Jacob Lew highlighted Greece’s financial plight as creating “uncertainties for Europe and the global economy more broadly.” His comments were followed by a warning from the G-20 about an uneven global expansion and worries over emerging market economies. Concern was also expressed over the Federal Reserve’s consideration of a rate increase this year.

Another cause for investor apprehension was the warning from American Express Company (NYSE:AXP) that despite a 6% rise in Q1 net income, a strong U.S. dollar reduced revenue from abroad and could have a negative impact on future earnings. Shares fell 4.4% on the day.

The Stoxx Europe 600 fell 1.8%, its largest one-day decline since January. And bond yields in Europe fell sharply as investors sought safer ways to invest even if they would receive a lower return. An inverted yield curve now faces investors in Greek bonds where short-term, two-year bonds are yielding 26.28%, but 10-year bonds are at 12.49%, indicating high risk of a near-term default.

Light, sweet crude for May delivery fell 1.7% to $55.74 a barrel, breaking a six-session streak of advances. However, oil finished the week up 7.9% for the best five-week gain since 2009.

The U.S. dollar fell against the euro on Friday and has lost 1.6% since April 10. Gold for June delivery rose 0.4%, closing at $1,203.10 an ounce, reflecting the problems in Greece.

At Friday’s close, the Dow Jones Industrial Average was off 279 points at 17,826, the S&P 500 fell 24 points to 2,081, the Nasdaq was down 76 points at 4,932, and the Russell 2000 lost 21 points at 1,252.

The NYSE’s primary market traded 891 million shares with total volume of 3.6 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 4-to-1, and on the Nasdaq, decliners led by 3.5-to-1.

IWM Chart
Click to Enlarge

Chart Key

iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is holding in a bull channel that began in early January. However, last week’s reversal, with a gap down from close to a new high and on high volume, is disturbing. MACD issued a sell signal on Friday as well.

S&P 500 Chart
Click to Enlarge

The failure of SPDR S&P 500 ETF Trust (NYSEARCA:SPY) to break to a new high and a gap down through the 50-day moving average on very high volume are major signs of weakness. MACD also reversed down.

Traders should be very aware of the support and resistance lines on this chart to guide their daily trades.

Dow Jones Industrial Average
Click to Enlarge

The break of the Dow Jones Industrial Average from 18,200 through the 50-day moving average at 17,959 is significant and supports, at least on an intermediate-term basis, the Dow Theory non-confirmation. Look for a test of the support line at 17,635 and the 200-day moving average at 17,400.


The market has finally revealed its intermediate-term direction and it is down. Thus, traders should revert to bearish strategies.

However, the overall trend is still up, and investors should enter orders to buy long-term investments under the Dow and S&P 500’s 200-day moving averages. Hard-to-buy names like Apple Inc. (NASDAQ:AAPL), FireEye Inc (NASDAQ:FEYE) and other highly desirable growth and value stocks, may be offered at discounts not seen since the last market adjustment in October.

In the long run, aggressive buying into weakness produces winners and the timid will lose.

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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