Yesterday, the Dow industrials jumped to within about 40 points of a new 2011 closing high as institutions continued to run up blue chips prior to the end of the first quarter. This puts the Dow up 6.7% for the quarter.
ADP reported a higher-than-expected increase in private payrolls, and that appeared to be enough to drive stocks to the high point of the day. However, stocks sagged on profit-taking in the last two hours of trading.
Daily Stock Market News
Dow: +72 points at 12,351
S&P 500: +9 points at 1,328
Nasdaq: +20 points at 2,777
Volume and Breadth
NYSE: 918 million shares traded; advancers ahead 2.7-to-1
Nasdaq: 482 million shares traded; advancers ahead 2.4-to-1
Futures and Related ETFs
May Crude Oil: -52 cents at $104.27 per barrel; Energy Select Sector SPDR (NYSE: XLE) +55 cents at $88.01 (new cycle high close)
April Gold: +$7.60 at $1,423.80 per ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU) +0.5 points at 215.16
What the Markets Are Saying
Regardless of the reason for the advance — Q2’s new Fed greenbacks or institutional window dressing — the trend is really all that matters, and it is up. In just 10 sessions, on light volume, buyers have pushed the S&P 500 through two technical barriers that are worth mentioning. The resistance at 1,290 to 1,300 was overcome in only four sessions, and it took just a single day to plough through the combination of the 20- and 50-day moving averages.
Yesterday’s pop seemed to take very little effort, even considering that most of the buying took place in the first two hours of trading — a normal pattern of institutional buying. In the absence of public participation, institutional blocks are more visible and often seen at the opening and closing of the day.
Until recently, the Nasdaq has lagged with most of the attention centered on the blue chips. But on Monday, the Nasdaq managed to close above its 50-day moving average, and yesterday, it put some icing on the cake by gapping up into its last major zone of resistance that spans 2,760 to 2,800. A close over 2,803 would no doubt run the junior index through a small gap at 2,808 to 2,824, made on Feb. 22, and then to an attack on the high at 2,841.
Even though the recent move in stocks may not appear rational, traders and investors alike should remain long and enjoy the ride. But that’s not to say that caution should be thrown to the wind. A dramatic reversal took place at this level in mid-February, and it could happen again. The apparent rush for institutional traders ends today, with the impetus to put money to work at the highest prices of the year. Trailing stop-loss orders should be entered by traders and intermediate-term investors alike.
One of the most difficult decisions for investors is when to sell stocks. In January, Investor’s Business Daily ran a series of articles called “22 Sell Rules to Increase Profits.” One of those technical pieces was called “Narrow, V Cup Bases Don’t Spell Victory.”
I mention this because I want to discuss what I refer to as a “deep ‘V’ top.” From my own experience and the writings of others (Edwards and Magee call it a “falling wedge-rising wedge”), and it’s very close to what IBD is describing: The deep “V” top usually occurs after a long run up like the approximate 950-point Dow run from early December to mid-February. It is followed by a reversal off of new high results in a sharp decline that takes several weeks, like the 840-point drop from Feb. 18 to March 16. But the volatility has only begun when a dramatic “V” reversal up occurs like that of the three sessions of March 15-17. The reversal surges with a fast and furious run to the old high driven by “fund managers and individual investors … desperately buying shares” as they scramble to not be left behind.
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This deep “V” top, or “V Cup Base” as IBD describes it, has a high risk of failure. And the present pattern with the current motive for buying in question, i.e., the end of the quarter, appears to mirror this pattern. But like any other technical formation, please be aware of its possible danger, but don’t presume that it is genuine until a daily reversal or series of reversals confirms its existence.
Wise traders always know what to look for and have an exit strategy that protects their gains. You have been made aware of the dangerous “V” top. Take action to protect your gains with trailing stop-loss orders.
For an oil ETF to buy, 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.
