After a week in which every day was down, ending three weeks of lower prices, stocks rallied on Monday. Technology stocks were in vogue following a 12-day losing streak and bounced — despite a sharp decline in Friday’s new issue Facebook (NASDAQ:FB) which closed at $34.03, down 11% or $4.20.
In addition to the market being grossly oversold and due for a bounce, investors were encouraged by a statement from China’s premier, who dwelled on boosting the country’s consumption rather than curbing inflation. This offset the gloom following an inconclusive G-8 meeting outside Washington, D.C., during the weekend.
At the close, the DJIA was up 135 at 12,504, the S&P 500 rose 21 to 1,316 and the Nasdaq led the other indices, gaining 68 points (2.46%) and closing at 2,847. Volume on the NYSE totaled 798 million shares, with Nasdaq trading 504 million. Advancers led decliners by 6-to-1 on the Big Board and by 3.4-to-1 on the Nasdaq.
Click to EnlargeI stuck my neck out on Monday saying the closest support was at 1,285 — but that was cutting it too fine, akin to “threading the needle.” Yesterday we got a reversal on the S&P 500 at 1,292, one point from the November intraday high at 1,293. This looks like a reversal that could carry us up for a couple of days and might even take the 500 back to its resistance (former breakdown) line at 1,340.
We knew that a rally or a “flash crash” had to be coming soon because our internal and sentiment indicators were so overbought. I referred to them several times last week.
Click to EnlargeThe Nasdaq’s reversal may appear more impressive than the 500’s. Its low of the day exactly matched Friday’s low and forms a fragile support line at 2,775. And there’s a strong buy from the stochastic, but the lack of volume (just 504 million shares) with breadth at just 3.4-to-1 is troublesome. The first line of resistance, like the 500’s, is at last week’s breakdown line. For the Naz, it’s 2,900.
Conclusion: Despite the strong stochastic, yesterday’s rally looks more like a reaction bounce than a true reversal. If the support lines hold, they and the former breakdown lines might define a trading range that could last through the summer.
But my guess is that, barring troublesome headlines from Europe, we’ll spend this week attempting, without success, to turn the tide up. We’ll run out of buyers, and then test the support areas surrounding the 200-day moving averages.
