Following weaker-than-expected economic numbers, the Dow fell over 75 points intraday, but recovered and closed in the black. The afternoon rally was led by consumer discretionary stocks, telecom and technology issues. But is one positive close enough to push stock prices forward on a broad advance?

On Thursday of last week, the Daily Market Outlook reviewed the Dow Jones Industrial Average. I noted that the index was trading in a bullish flag, and that in order to break out of the flag, a move above 12,640 was required. Well, the Dow is still trading within the flag, but the situation is now critical. Instead of a quick breakout, the Dow has sagged under the resistance zone at 12,420 to 12,450 and additionally has penetrated its 50-day moving average, which is now at 12,424. 

A reversal on Wednesday failed to penetrate the blue line and yesterday’s close missed, as well. The Moving Average Convergence/Divergence (MACD) is oversold, and so the stage appears to be set for a move higher, but low volume of just 868 million shares traded on the NYSE, and with breadth at 2-to-1, advancers over decliners, the chances of a breakout are falling.

Several things stand out on the Nasdaq chart, and only one is good. The good one first: MACD is very oversold and appears to be arching toward a move up (red line going flat). A buy signal from MACD would be triggered when the red line crosses above the blue line.

But the support that we last covered at 2,802 became resistance when, on Monday, the index gapped down through not only the support line, but also the 50-day moving average, which also becomes resistance, at 2,788. And, the bottom of the gap that was opened on Monday, which is Friday’s low at 2,796, also becomes a point of initial resistance. 

Conclusion: Even though the dollar had a modest fall with the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) off 9 cents to $21.62 and holding, there is not yet enough evidence to become a strong bull. The major indices appear trapped in a flag that should fly not sag, and unless buyers emerge soon, the flag formation itself could become a major zone of resistance.

For one stock that is ready to break out, 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.