Near-Term Outlook Turns From Bullish to Flat

The Dow's tight flag pattern has developed into a small rounding top

An afternoon rally saved the major indices from a slight loss on Thursday. While a number of companies delivered upbeat earnings reports, the early selling was largely the result of Ford Motor Company’s (NYSE:F). The automaker fell 8.2% after reporting declining profits and lowering sales guidance for the second half of the year.

The biggest decliner on the S&P 500 though, was Whole Foods Market, Inc. (NASDAQ:WFM), which fell 9% after a nasty sales shortfall.

But investors were cheered by Facebook Inc’s (NASDAQ:FB) strong report, sending the stock 1.4% higher. So far, more than half of the S&P 500’s companies have reported quarterly earnings.

Oil lost 1.9% at $41.14 a barrel as stockpiles continue to increase and is now off 15% for the month.

At Thursday’s close, the Dow Jones Industrial Average fell 16 points to 18,456, the S&P 500 gained 3 points at 2,170, the Nasdaq rose 15 points to 5,155, and the Russell 2000 was down 2 points at 1,217.

The NYSE Composite’s primary exchange traded 875 million shares with total volume of 3.7 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers slightly exceeded decliners, and on the Nasdaq, decliners led by a small amount. Block trades on the NYSE declined to 5,436 from 5,682 on Wednesday.

Dow Jones Industrial Average Chart
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Instead of a breaking a tight flag, the current formation in the Dow Jones Industrial Average has developed into a small rounding top. Support rests initially at the April high at 18,168, but the line at 17,950 represents several tops and defines the old trading zone of 16,680 to 17,950. The 50-day moving average is also in that general area at 17,960. Volume has turned negative and so has MACD.

Dow Jones Transportation Average Chart
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The Dow Jones Transportation Average, the other major Dow Theory index, has again registered a “non-confirmation.” It failed to overcome the powerful resistance line at 8,100 despite a modest pickup in volume and now must face support at the 50-day (7,705) and 200-day (7,671). MACD is slightly positive but headed down.


Although the longer-term outlook remains bullish, the near term has turned flat. The Federal Reserve’s decision not to raise interest rates due to “economic numbers” has me convinced it will always be able to find a reason to delay a rate hike since there is always a crisis of some sort somewhere. But some, including Brian Wesbury, chief economist of First Trust Advisors, think a hike in September is likely “despite a wimpy Fed.”

I personally doubt it, especially considering the Fed is not in the habit of raising rates right before a presidential election.

Even if the Fed hikes rates, which is needed, it would probably not turn the market lower. In fact, it would signal to investors that the economy is strong enough to absorb a rate hike, and the bond market has already priced one in.

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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