Stocks fell on light volume yesterday, following more news about troubled European economies. A stronger opening in U.S. stocks was followed by midday selling after the euro slipped and the U.S. dollar rallied. And Moody’s said that it may downgrade its rating on Spanish debt, while S&P lowered its ratings outlook on Belgium from “stable” to “negative.”

In economic news, the Consumer Price Index (CPI) for November rose 0.1% versus 1.1% a year ago, and confirmed the Fed’s view that inflation is not currently a problem. And the Fed reported that industrial production in November rose 0.4%, but capacity utilization increased by only 0.3% to 75.2% in October, which is well below average. The National Association of Home Builders said its index of builder confidence was flat in December.

In corporate news, Novartis AG (NYSE: NVS) rose 5.7% after increasing its offer for eye-care specialist Alcon, Inc. (NYSE: ACL). Goldman Sachs Group, Inc. (NYSE: GS) fell 1.3%, and Morgan Stanley (NYSE: MS) fell 1.6% following a cut in ratings of investment banks by several Wall Street analysts. Joy Global Inc. (NASDAQ: JOYG) jumped 6.9% after exceeding analysts’ fiscal year Q4 earnings estimates. And The Boston Beer Company, Inc. (NYSE: SAM) raised its forecast for 2010 earnings to $3.30 to $3.60 from $2.85 to $3.15, and the stock spiked 12.06%. 

Treasurys continued to fall with the 10-year note dropping 0.531% to yield 3.524%, and the 30-year bond dropped 0.686% to yield 4.598%. Municipal bonds continued to be hard hit as prices fell sharply for the second consecutive day. Yields are now at the highest in 16 months with high-grade 30-year bonds at 4.84%. 

The euro took a big hit on Wednesday, falling to as low as $1.3210, down 1.6% from Tuesday’s final price.

At the close, the Dow Jones Industrial Average fell 19 points to 11,457, the S&P 500 dipped 6 points to 1,235, and the Nasdaq was off 11 points at 2,617. The NYSE traded 1.1 billion shares with decliners over advancers by over 2-to-1. The Nasdaq crossed 552 million shares with decliners ahead by 1.5-to-1.

Crude oil for delivery in January rose 34 cents to $88.62 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell 36 cents to $65.79. February gold fell $18.10 to $1,386.20 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) was off 3.89 points to 221.20.

What the Markets Are Saying

After pushing hard for a new two-year high, the Dow Industrials succumbed to light selling yesterday and a minor reversal. But the downside leader was the broad-based S&P 500, off 0.51%, which broke its near-term pattern setting the index up for a pullback to its most recent breakout line at 1,227.

The Dow started off higher yesterday and held its gains until lunchtime when the European markets closed lower with the euro taking a real beating and the dollar again soaring. It was at that exact moment that U.S. markets turned south as the euro down/dollar up/stocks down pattern reasserted itself. 

Those who wish to follow the euro should focus on the CurrencyShares Euro Trust (NYSE: FXE), which is an exchange-traded fund (ETF) directly tied to the currency. From a technical viewpoint, FXE is in a correction following a run to over $1.42 in early November. It has support at its 200-day moving average at $131 and an intermediate support line at $130. The trust closed yesterday at $131.69.

Yesterday’s shallow retreat does not change the overall direction of the market, which is long term up and intermediate term up. But short-term traders may now want to ride a pullback to the first meaningful support lines for each of the indices.

Here is a summary of near-term support for each of the major indices: 

• Dow: 11,259 (20-day moving average)
• S&P 500: 1,227 (November breakout)
• Nasdaq: 2,592 (November breakout) 

Readers will note that, with the exception of the Dow Industrials’ number, these are the same support lines noted in Tuesday’s Daily Market Outlook, which recognized the one-day reversal of Nasdaq on Monday, preceded by eight successive advances.

Long-term traders should prepare to buy their favorite yuletide stock picks on a shallow pullback in preparation for a year-end to mid-January rally. (For one such stock, see the Trade of the Day.) But day traders may want to take any intraday rally as an entry point for a quick downside trade.

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.