After two days of being clobbered for a total of 262 Dow points, stocks rallied yesterday, taking back 83 points, albeit on very light volume.
A rebound in financials and retail stocks was responsible for most of the gains. During the previous two-day drop, the financials gave up more than 4%, but yesterday they took back almost half of the losses, rising 1.9%.
Better-than-expected earnings from Home Depot (HD), up 3.1%, and advances from fellow Dow components American Express (AXP) and Alcoa (AA), each up more than 4%, helped the index.
Target (TGT), up 3.11%, led the retail group with its biggest gain since April — the result of a smaller-than-expected loss. Saks (SKS) also rose on a smaller-than-expected profit decline, and the retail group gained 1.8%.
The market rallied despite news that housing starts and building permits for July faltered. Analysts were disappointed by the reported annualized rate of 581,000 and 560,000, respectively. But there were sighs of relief over producer prices for July, which declined 0.9%, suggesting that inflation is still under control.
At the close, the Dow Jones Industrial Average (DJI) gained 83 points, closing at 9,218, the S&P 500 (SPX) gained 10 points to 990, and the Nasdaq (NASD) rose 25 points to 1,956.
Volume on the NYSE totaled 991 million shares with advancers ahead of decliners by 4-to-1. On the Nasdaq, advancers led by just less than 3-to-1 on volume of only 541 million shares.
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Crude oil rebounded after a two-day fall of more than 5%. The September contract rose $2.44 to $69.19 a barrel, and the Energy Select Sector SPDR (XLE) gained 49 cents to $49.56.
December Gold closed at $939.20 an ounce, up $3.40, sparked by a weaker U.S. dollar. And the PHLX Gold/Silver Index (XAU) closed at $141.22, up $2.09.
What the Markets Are Saying
Despite the number of points gained, yesterday’s rally was one of the lowest-volume days this year, and the breadth up was much less powerful than the breadth down on Friday and Monday.
The chart patterns tell their own story:
The Nasdaq’s 1.3% gain yesterday appears to give it the edge over the other major indices since the Dow was up 0.9% and the S&P gained 1.01%.
But after failing to drive through the compound top at 2,015, Nasdaq fell 2.7% on Monday, opening a gap as it drove through the 20-day moving average. And the gap looks like a breakaway gap on the downside, telling us that the decline for the Nasdaq has probably just begun.
Its feeble attempt to close that gap yesterday will likely fail, and the next stop is the support beginning at the 50-day moving average at 1,884, with trading support at 1,880 to 1,770.
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As for the Dow and the S&P, yesterday both indices gained enough to reach their 20-day moving average, but failed to reach the two-week trading island that they broke from on Monday. Both indices will likely make another attempt today, but with such low volume success is unlikely.
There is some initial support for the Dow at 9,000, but the heavy support begins at 8,878 to 8,760. The S&P 500 poked into an initial support zone on Monday at 980, but the major support is at 950 to 945.
The internal indicators are now somewhat oversold, but sentiment is neutral to bearish. This and the chart patterns are telling us that a short-term rally could drive prices slightly higher, but it will likely fail to achieve much more than a penetration into the low end of the two-week trading range from which prices broke on Monday.
Traders could use this rally to enter short sales, and longer-term investors can write options or take other defensive measures as they wait for prices to fall to the next buying zones.
Today’s Trading Landscape
Earnings to be reported include: AFC Enterprises, American Woodmark Corp., BioForm Medical, BJ’s Wholesale Club, Cardiovascular Systems, ChinaEdu Corp., Citi Trends, Cyberonics, Deere & Co., Eaton Vance Corp., Flowers Foods, Gymboree Corp., Harman International Industries, Hot Topic, JDS Uniphase Corp., Limited Brands, Mayr-Melnhof Group, NetApp, Perry Ellis International, PetSmart, Phillips-Van Heusen Corp., Semtech Corp., Synopsys, Tween Brands, Yingli Green Energy Holding Co. Ltd. and Zumiez.
Economic reports due: MBA Purchase Applications and EIA Petroleum Status Report.
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