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2 Signs Point to a Near-Term Rally

Stocks fell throughout the day on Friday on a mixed jobs report. The Dow Jones Industrial Average declined 1.7%, the S&P 500 was off 1.5% and the Nasdaq Composite lost 1.1%.

Nonfarm payrolls for August increased by 173,000. While the headline number was below the 220,000 expected by economists, a closer look showed better-than-expected average hourly wage growth of 2.2%. And the unemployment rate fell to 5.1% from 5.3%.

Overall the report provided little clarity about when the Federal Reserve may raise interest rates.

All 10 S&P sectors closed down for the day with materials and financials leading the pack lower, both off 2%.

The U.S. dollar retreated 0.2% against the euro, which closed at $1.1150. The yield on the 10-year Treasury note fell to 2.13% from 2.18% on Thursday. Crude oil declined 1.5% to $46.05 a barrel but ended the week up 1.8%.

At Friday’s close, the Dow Jones Industrial Average fell 272 points to 16,102, the S&P 500 lost 30 points at 1,921, the Nasdaq fell 50 points to 4,684, and the Russell 2000 was down 9 points at 1,136.

The NYSE Composite’s primary market traded 850 million shares with total volume of 3.2 billion shares. The Nasdaq crossed 1.6 billion shares. On the Big Board, decliners outpaced advancers by 3.1-to-1, and on the Nasdaq, decliners led by 1.7-to-1.

For the week, the Dow fell 3.2%, the S&P 500 lost 3.4%, the Nasdaq was down 3%, and the Russell 2000 dropped 2.3%.

Dow Jones Industrial Average Chart
Click to Enlarge

Chart Key

The Dow Jones Industrial Average broke from a rounding top in August. In just three sessions, the index broke the October closing low of 16,117.34, setting a new closing low at 15,871.35 on very high volume and negative breadth. This closing low must now be considered an important inflection point.

Dow Jones Transportation Average Chart
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The Dow Jones Transportation Average broke the October closing low at 7,717.69 by setting a new closing low and inflection point at 7,466.97. But on Wednesday, the bulls stirred on a high-volume day of buying. However, buyers weren’t able to break from the downtrend that has been in effect since May.


Despite the Dow’s lack of support with sellers outpacing buyers by a wide margin, there are two indications of a possible near-term rally:

1. Wednesday’s high volume from transport buyers that clearly outpaced both buying or selling volume on a single day during the entire year; and

2. The NYSE High-Low Index, which registered the most new lows since October 2011.

The High-Low Index is considered “oversold” when it falls under 25%, as it did in August 2013, October 2014 and July 2015. But this is the first time since October 2011 that it has registered such a deeply oversold market with a reading of about 9%.

This is a short-term indicator, so I wouldn’t expect it to signal a major reversal. However, if you are a trader, you might consider a quick trade for a bounce of 5% to 10% before settling in for a longer, volatile test of the lows.

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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