Financial stocks led a monster rally in the Dow Jones Industrial Average yesterday, following an optimistic earnings forecast from Bank of America (NYSE: BAC). The broad market gained despite falling oil prices and an earnings miss by McDonald’s (NYSE: MCD). 

Daily Stock Market News

Dow: +124 points at 12,214
S&P 500: +12 points at 1,322
Nasdaq: +20 points at 2,766

Volume and Breadth

NYSE: 1 billion shares traded; advancers ahead 3.1-to-1
Nasdaq: 497 million shares traded; advancers ahead 2.6-to-1

Futures and Related ETFs

April Crude Oil: -42 cents at $105.02 per barrel; Energy Select Sector SPDR (NYSE: XLE) -64 cents at $77.81

April Gold: -$7.50 at $1,427.20 per ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU) -1.86 points at 212.12

What the Markets Are Saying

Stocks registered another triple-digit day in which volatility was again very high. The S&P 500 dove like an Olympian from a high board at the start of the trading day, taking back over half of Monday’s final-hour gains in minutes. But then the index reversed, and in three quick gaps jumped 10 points to 1,318 where it traded until noon.

Why the wild action at the start? 

Stocks sold off at the opening when oil prices sprang back from overnight selling due to reports that OPEC would increase production. Just after stocks opened the rumor was denied and stocks rallied. Why do I mention this? It is an example of how traders are reacting to every bit of news pertaining to oil and anything related to it, including how the revolution in Libya is going or whether there will be demonstrations in Saudi Arabia on Friday.

Technically there is another view, and it is easily demonstrated by a chart of the S&P 500 drawn starting at the end of January to the present. The index broke out from 1,225 in early December, and ran to a high of 1,344.97 for a quick move just shy of 10%. The indices, illustrated by the 500, are consolidating after that run-up. 

The consolidation is taking the form of a small symmetrical triangle with prices fluctuating around a mean of 1,319.16. As prices reach the apex of the triangle, the daily fluctuations will often become more volatile until prices break strongly on higher volume. The break usually, but not always, moves in the direction of the overall trend, which is now up. 

Symmetrical triangles often run for weeks and even months, and that’s why I call this one “small.” The formation is also called a “coil” by some analysts since it acts like a coiled spring, releasing its energy with a final breakout.

The chart also shows that the bulls have thus far been successful in keeping prices above the 50-day moving average (blue line) that has defined the uptrend from the August low. The 50-day moving average is currently at 1,299.62. 

The bears, however, have managed to pull off three very strong days down with higher volume than on rallies. Yesterday’s triple-digit rally only brought in 1 billion shares on the NYSE, and this is a sign of overall distribution and should caution us to remain neutral until the coil is sprung.

Still, the overall trend is up and a successful breakout through the resistance line at just under 1,330 would be a clear positive. But a break below the 50-day moving average would signal that a deeper pullback is likely. 

Traders may want to swing between the highs and lows of the triangle. Longer-term investors should wait for the coil to spring. 

For one stock to buy now, 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.