Within minutes of the opening yesterday, the Dow industrials were over 150 points higher than Wednesday’s spectacular 287-point gain. The big opening gap came following a decision by China’s central bank to cut its benchmark interest rate for the first time in four years. And sentiment was helped by the anticipation that Fed Chairman Ben Bernanke would give an indication of further stimulation to the economy.
But the positive tone changed to hesitation after Bernanke failed to outline any new stimulus plans. And within an hour of the close, profit-taking took back almost all of the early gains. At the end of the session, the Dow Jones Industrial Average had gained 46 points at 12,461, the S&P 500 was off a fraction at 1,315, and the Nasdaq fell 14 points to close at 1,831. The NYSE traded 849 million shares while the Nasdaq crossed 459 million. Decliners edged out advancers on the Big Board by 1.2-to-1 and on the Nasdaq by 1.5-to-1.
The market opened higher because of a Chinese rate cut, but by the time the Fed Chairman finished his testimony that was forgotten and so was an expectation that the Chairman would be embarking on QE3 in the near future (he still may, but didn’t say so yesterday).
Thus, the S&P 500 took back all of the early gains while the Dow industrials, which will benefit from China’s rate cut, held onto a part of its early gain. Technically the failure to hold onto the gains almost turned into a daily reversal for the S&P 500. What started out so promising turned into a negative event as the index couldn’t even hold above its 20-day moving average or move its momentum indicator into positive territory.
The Nasdaq’s performance was even worse than the S&P 500’s. In closing lower by 14 points, it failed to penetrate its 20-day moving average by 11 points, and its momentum also failed to turn positive.
Conclusion: Yesterday was a huge disappointment for the bulls. Had the key indices been able to hang on to the early gains, an attack on the immediate resistance lines would be in easy reach. Now the indices have to make up for lost ground against the persistence resistance offered by the bearish flag formation and bounded by a very narrow trading range. For the S&P500, the range is 1,293 to 1,336, and for Nasdaq it is 2,737 to 2,885.
Yesterday’s miserable performance should be enough to persuade traders to sell into any further strength and prepare for a test of the 200-day moving averages. If they fail to hold, stocks could have a sharp breakdown.
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.
