Stocks turned north yesterday following an upside reversal of several important indices on Tuesday. But will the reversals stick and lead to a broad market advance, or will stocks fizzle?
On Monday, we highlighted two patterns on the charts of the Nasdaq and Russell 3000 that told us that the presence of flags and pennants is characteristic of a bull market run.
Interestingly, yesterday Arthur Hill of StockCharts.com IDed a flag on the chart of the SPDR Dow Jones Industrial Average (NYSE: DIA), and said that a move above Friday’s high ($125.85) is required to confirm the reversal (chart not shown). A breakout is required to confirm a bullish flag and, in my opinion, the flag on the chart of the underlying index (below) would be triggered when the resistance line, now at the conjunction of the 20-day moving average (green line) and the red resistance line at 12,640, is exceeded on a close — just a mere 80 points above yesterday’s close.
The Dow’s chart shows several more bullish components. The breakout from the double-top (head-and-shoulders) black line is very bullish and gives a target of about 13,350. Before the breakout, that line was called “resistance,” but it now becomes “support.” And there is another positive indicator: Momentum is turning up from an oversold level (red histogram.)
The blame for much of the recent decline in the prices of precious metals, energy and stocks has been attributed to a stronger U.S. dollar.
But, on May 13, we drew attention to the chart of the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) noting the importance of the support point at $21.59, and saying a close under that number would be a “plus for stock market bulls. Yesterday, UUP closed at $21.59 and the stochastic is very close to issuing a new sell signal.
Traders should watch this very closely since a breakdown in UUP could drive the dollar down to the red dash support line at around $21.25, and provide for trading opportunities in precious metals and energy stocks.
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.
