Last week’s trading started off on shaky ground following a request by Spain for another $125 billion to help its ailing banks. That was followed by a downgrading of Spain’s bond rating by Moody’s to just above “junk” status, and the U.S. markets fell sharply. On Tuesday, Cyprus made a bailout request, but stocks sprang back on talk of a “banking union” in Europe and hints from the Fed of further stimulus here.
Despite the international chaos, the Dow Jones Industrial Average rose triple digits on Thursday and Friday. The reason appeared to be a determined effort on the part of the ECB to assure global investors that the central bank was willing to ease monetary conditions and avoid a “run” on the banks. And the Bank of England revealed measures to “flood its banking system with liquidity,” according to The Wall Street Journal.
At the close on Friday, the Dow Jones was up 115 points to 12,767, the S&P 500 rose 14 to 1,343, and the Nasdaq jumped 36 points to 2,873. The NYSE traded 1.5 billion shares, and 791 million traded on the Nasdaq. Advancers were ahead of decliners by 1.3-to-1 on both exchanges.
On Friday, in anticipation of a eurozone bailout by the ECB coupled with a quadruple witching hour in options, short sellers appeared to cover their positions and hedge against a more favorable short-term European political/financial outcome to Sunday’s election in Greece.
The S&P 500 broke through the resistance line (now support line) at 1,336, and by closing near the high of the day is now challenging the 50-day moving average at 1,348 and the resistance line at 1,358. Note the overbought stochastic.
On Friday, the Nasdaq, the former leading index in both bull and bear moves, jumped 1.29% but failed to break the important resistance line at 2,882. Its stochastic fast line is overbought, but if it closes above 2,882, look for an attack on resistance beginning with its 50-day moving average, now at 2,924.
Of the senior indices, the Dow Industrials had the best week with a finale that drove the index through both the resistance (now support line) at 12,716 and its 50-day moving average at 12,752. Its next resistance is at the February highs at around 13,000. Note that, like the other indices, its stochastic is overbought.
Conclusion: The investment world is looking for relief from the stress of a deteriorating condition in Europe. Some relief came on Friday with assurances by the ECB that it would provide enough liquidity to stop a “run on the banks.” It is possible that European headline news, coupled with the quadruple options closing, triggered a massive, emotional liquidation by the short sellers.
Technically, the near-term trend has shifted into up, but I’m not confident that the trend will continue with enough momentum to break prices above the massive overhead illustrated on each of the above charts and force a change in the intermediate trend, which still is sideways.
For help in determining the power of sudden, emotional and volatile breaks, I go to our internal indicators. We see the stochastic as “overbought,” but not drastically so. MACD also is overbought, but RSI is neutral. As for the “sentiment indicators,” the AAII Survey shows that bullish sentiment has risen to a six-week high, the highest since May 3. Bearish sentiment had the largest one-week drop since Jan. 5. This does not favor a strong move up.
While momentum is overbought, it is, in the near term, very strong. Thus, traders might want to play the bullish side of the market with very close stops and, of course, day traders will play both sides. But it is time for other investors to wait for an outcome to the volatile global struggle that is now occurring before committing meaningful assets to uncertain outcome.
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.
