Stocks fell sharply yesterday morning, following growing tensions in Korea, and worries over Europe’s bailout of Irish debt and its inability to contain the crisis. And selling escalated after a cut in estimated worldwide PC shipments.

By 10 a.m., the Dow Industrials were off 160 points but rebounded quickly as bargain hunters nibbled at some of the sharpest decliners. Until mid-afternoon, stocks traded in a broad range until dealers put $9 billion of Treasury note sales to work in the equity market. That action turned the market higher, and by the close, most of the losses had been erased.

Retailers were encouraged by Black Friday sales, and there were reports from online retailers that Cyber Monday sales were strong. Amazon.com, Inc. (NASDAQ: AMZN) rose 1.3%, hitting an all-time high as analysts predicted that retailer would gain market share this year. 

Despite the trouble with European banks, financials on this side of the pond were among the best performers. American Express Company (NYSE: AXP) rose 2.51%, and Bank of America Corporation (NYSE: BAC) gained 1.71%. Huntington Bancshares Incorporated (NASDAQ: HBAN), Regions Financial Corporation (NYSE: RF) and Wells Fargo & Company (NYSE: WFC) were also all higher.

The euro fell to $1.3123 versus the U.S. dollar from $1.3248 on Friday, as the 85 billion euro Irish debt bailout fueled fears that Portugal, Spain and Italy may also suffer the same fate. And even Belgium was mentioned as a possible problem country.

Treasurys rose following the Fed’s purchase of T-bonds. The 10-year note rose 0.4375%, pushing the yield down to 2.82%.

At the close, the Dow Jones Industrial Average fell 40 points to 11,052, the S&P 500 lost 2 points at 1,188, and the Nasdaq fell 9 points to 2,525. The NYSE traded 924 million shares with decliners ahead of advancers by 1.4-to-1. The Nasdaq traded 481 million shares with decliners ahead by 1.2-to-1.

Crude oil for January delivery rose $1.97 to $85.73 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) closed at $62.93, up 42 cents. Sovereign debt worries sent gold higher with the February contract gaining $3.20 to settle at $1,367.50 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 1.01 points to 210.8.

What the Markets Are Saying

After 30 minutes of what appeared to be a collapse of equity prices, Wall Street looked geared for another sell-off following news from Europe that did not inspire investor confidence. But a rush to bargain hunt funded by two Treasury purchase programs injected cash into the market, and it was buying from those programs that turned the market.

Yesterday’s turn again occurred at S&P 500 1,174, reinforcing that line as the most important support feature on the chart. But if it wasn’t for the Fed’s injection of more cash into the market, it is doubtful that the day’s early losses would have been reversed. And another outside influence, a rising greenback, also had a lot to do with the bounce.

The intraday reversal yesterday was impressive, but the quality of the turn is questionable. Had the rush to buy been the result of an enthusiastic public display of optimism rather than the Fed’s “second Permanent Open Market Operation of the day,” as Briefing.com put it, we could all sleep better. 

Adding to my concern about yesterday’s buying is a chart feature that hovers over the near-term market. Yesterday’s turn from the support at S&P 1,174 followed an intraday penetration of the 50-day moving average — the first violation of that line since early August. And as a result of back-and-forth trading over the past 10 days, the support line at 1,174 appears to have become the possible neckline of a small but significant head-and-shoulders (SHS) formation.

Anticipating a head-and-shoulders pattern should be treated as a cardinal sin — the equivalent of shouting fire in a crowded theater. This is because most of the early forming SHS patterns never work out. However, another day of selling like yesterday, and a close below 1,174, would result in a breakdown with a target of around 1,120.

Please don’t interpret this as a change-of-trend call; it’s merely an alert. All purchases should be put on hold and traders might want to review short-term bearish strategies until a solid signal is given.

For one bearish trade, see the 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.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.