On Friday, the U.S. dollar continued to be the currency of choice as Spain scrambled to prop up its banking system and Greece plodded toward an exit from the euro zone. Headline news again focused on Europe as the markets disregarded a better-than-expected consumer confidence index. Both initial jobless claims and housing starts came in slightly better than expected.
Despite ending the week with a net gain, Friday’s action was negative with the Dow Jones Industrial Average closing at 12,455, down 75 points. The S&P 500 lost 3 points at 1,318, and the Nasdaq fell 2 points, closing at 2,838. Pre-holiday volume was light with just 595 million shares trading on the NYSE and 348 million on the Nasdaq. Advancers fractionally exceeded decliners on both exchanges.
Despite its breakdown from the neckline at 12,716 last week, the Dow closed the week with a gain of 86 points and held just above its first support line at 12,300. The impact of holding at the first support line is positive for the bulls and confirms the trading zone of 12,300 to 12,716.
The broad-based S&P 500 also held at its first line of support at 1,293, reversing from it on Friday, May 18, after posting an intraday low of 1,292. Resistance for the S&P 500 begins at the March low of 1,340. Like the Dow, last week’s action, though mildly positive, lacked strong upside volume with defensive sectors getting the most buying.
We’ve often heard the term “bearish price action” and what that usually means is that despite a minor advance there are chart patterns that usually result in a new low. The bearish flag is one of them.
After falling to a new low, it is not unusual to have a rally of a week or two that forms a channel with higher highs and higher lows. The pattern doesn’t break through resistance and is confined to the overall downtrend. We see such a pattern in last week’s rally.
Bearish flags almost always eventually break downward and even during the advance phase seldom pick up any positive signals from the internal indicators. Note that the momentum index is still deeply in negative territory.
Conclusion: The May downturn has produced major technical damage. Last week’s rally lacked depth and momentum with defensive sectors receiving most of the buying. But stocks are very sensitive to news, both good and bad, and I would expect the worst and hope for the best.
The trading zones have been clearly laid out in last week’s Daily Trader’s Alerts and my expectation is that they will remain intact for several more weeks with short-covering rallies dominating the trading. These rallies are great opportunities to sell underperforming stocks and load up on short-sale candidates.
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.
