Why Traders Should be Critical of This Rally

Despite the big jump, some major indices are still struggling

Stocks around the globe jumped Wednesday following a report that Germany may offer a staggered plan to Greece that would allow disbursement of additional funds. The deal is apparently what Greece has been seeking and promotes reforms insisted upon by the lenders. In addition to a rally in U.S. stocks, Germany’s DAX ended up 2.4%.

All 10 sectors of the S&P 500 showed a gain, and all 30 of the Dow’s components closed higher.

Technology stocks led the advance, up 1.6%. Banks also did well, with the KBW Bank Index gaining 1.3%.

Crude oil closed up 2.1% at $61.43 a barrel. Prices rose to a new high for the year on stronger-than-expected demand and a report that stockpiles dropped by 6.8 million barrels. This was the biggest decrease in stockpiles since July and the result of wildfires in Canada halting some production there.

Gold for August delivery rose 0.8% to close at $1,186.60 on a weaker U.S. dollar. The buck fell 0.6% versus a basket of currencies.

Bonds continued the recent sell-off with the yield on the benchmark 10-year Treasury note rising to 2.48%, up from 2.42% on Tuesday. The 10-year German bond rose to over 1%, its highest yield in nine months.

The sole economic report of importance to stocks was the MBA Mortgage Index. The weekly index jumped 8.4% following a 7.6% decline the week before.

At Wednesday’s close, the Dow Jones Industrial Average was up 236 points at 18,000, the S&P 500 gained 25 points at 2,105, the Nasdaq rose 63 points to 5,077, and the Russell 2000 gained 17 points at 1,267.

The NYSE’s primary market traded 782 million shares with total volume of 3.4 billion shares. The Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 2.5-to-1, and on the Nasdaq, advancers led by 2.7-to-1.

Dow Chart
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Chart Key

Despite Wednesday’s triple-digit jump, the Dow industrials are still struggling. The day’s high penetrated the 50-day moving average at 18,021 by a slight margin and then fell to close under it. The big test at the range of 18,103, the Dec. 26 high, and the March 2 closing high at 18,289 is yet to come. Short-term momentum has turned up, but mediocre volume doesn’t usually sustain a breakout.

Nasdaq Chart
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On the Nasdaq, Tuesday’s jump from the low at 4,974, which connects to a trendline in January, was impressive. But the bulls tried to punch to a new high in May only to be disappointed. MACD is still negative and, as noted, volume is still on the light side.

Conclusion

Total volume of 3.4 billion shares is just below average for the year, and unless it increases with advancing prices, chances are strong that the attack on the highs will fail.

Why am I negative on such a strong day up? I’d feel much better about Wednesday if the rally had been the result of solid earnings. Instead it resulted from “Greece again” and higher oil prices.

I could be wrong, but this year trading the support and resistance lines has been the only consistently successful tactic. The breakouts in March, April and May all resulted in a pullback to around the 50-day moving averages of the major indices. And note that the 50-day moving averages have turned flat. Thus, it looks like more of the same until about October.

However, the best strategy for consistent returns in a flat equity market is to sell bonds and buy bank stocks like the Trade of the Day.

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, https://investorplace.com/2015/06/daily-market-outlook-why-traders-should-be-critical-of-this-rally/.

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