On Tuesday, the Dow industrials broke a four-day losing streak following a favorable reading on the service sector. A teleconference between G-7 finance ministers helped, as well, since it showed a determined effort on their part to take needed action.
There were gains in small-cap and midcap stocks for the second day. At the close, the Dow Jones Industrial Average was up 26 points at 12,128, the S&P 500 rose 7 points to 1,285, and the Nasdaq jumped 18 points to close at 2,778. Big Board volume declined to 707 million shares with a similar decline in the Nasdaq where 431 million shares traded. On the NYSE, advancers were ahead of decliners by 2.8-to-1, and on the Nasdaq advancers were ahead by 1.9-to-1.
Fear is on the lips of almost everyone, and that means that we should take a close look at the possibility of a meaningful rally. On Monday, both the S&P 500 and Nasdaq flashed a reversal from our proprietary Collins-Bollinger Reversal (CBR) indicator. Yesterday, the S&P 500 closed modestly higher and enough to land it smack on its 200-day moving average, and its stochastic flashed a near-term buy signal.
The Nasdaq was more vigorous. After a CBR buy signal on Monday, yesterday it popped above its 200-day moving average by 17 points. Its stochastic is very close to issuing a buy signal.
The CBOE Volatility Index (VIX), sometimes called the “fear index,” is a contra-indicator. When it goes down, the market should head up. Yesterday, the VIX closed under its 200-day moving average and its stochastic issued a sell signal. Therefore, the VIX supports a near-term rally.
Conclusion: Following one of the worst May declines on record, fear, distrust and uncertainty are pervasive. Yesterday’s rally lacked convincing volume, but breadth was acceptable enough to tell us that a reaction rally is likely.
If the Europeans can provide some positive headlines, and we can pass the week without some unforeseen disaster, the market could have a tradeable rally.
Resistance for the S&P 500 begins at 1,293 (October high) and extends to the top of the bear flag at 1,336. A Nasdaq rebound could be a bit more robust since it has already cleared its 200-day moving average, as well as its October high at 2,737. Resistance appears at the top of the bear flag at 2,882 and the top of a gap made in early February at 2,885.
Aggressive traders should take long positions with close stops. Long-term investors may try to grab a blue-chip bargain or two similar to our Trade of the Day.
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.
