Stocks fell sharply at Monday’s opening with the Dow Jones Industrial Average off 130 points in the first five minutes of trading. The catalyst for the lower opening was a cut in the investment rating of Bank of America (NYSE:BAC) by Goldman Sachs (NYSE:GS). Pressure on the euro nations to do something about Greece was another negative.
But stocks fought back on low volume, and by the closing bell they had taken back many of the early losses. However, the bank group failed to respond and closed lower by about 1%.
At the close, the Dow fell 7 points to 12,654, the S&P 500 was down 3 points at 1,313, and the Nasdaq was off 5 points at 2,812. The NYSE traded just 743 million shares and the Nasdaq crossed 427 million. Breadth was negative with decliners ahead by almost 2-to-1 on both exchanges.
The major indices have lost ground for three days in a row following Thursday’s reversals. That’s the bad news. The good news is that despite the sharp decline on yesterday’s opening, volume has been contracting, and that’s a strong positive. Thus, last week’s failed breakout appears to be no more than the first of perhaps up to three attempts at a new high before the sellers are dissipated.
Support for this first reversal of the S&P 500 is at a tight zone from 1,285 to 1,295. These are lines drawn from the October high. The chances are strong that this first zone will hold, especially if downside volume remains low.
The second support area is much more important because it is the result of a cross of the 50-day moving average through the 200-day moving average. This in itself is a very positive indicator called a “golden cross,” which, if violated, could cause real trouble for the bulls.
Note that the MACD indicator has flashed a sell signal. But ignore that for now since the MACD is much more reliable at picking bottoms than tops.
Unlike the other indices, the Nasdaq actually succeeded in setting a new intraday high on Thursday, but quickly reversed from it. The first support line is drawn from the October high at 2,753, and like the S&P 500, this line should hold on the first pullback unless volume increases. The second support at 2,650, like the support at the S&P 500’s golden cross, is an important area. We don’t want to visit it quite yet.
Conclusion: The first attack on new highs failed as expected. But the Nasdaq made a new high before retreating. The first lines of support should be used by traders to take positions in the most volatile sectors for a bounce that could break to new highs — but volume is the key to recognizing the power of any move from the current zone. If volume increases on the upside, the indices will signal that a breakout is imminent — of course, the opposite is also true.
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.
