When I left for a week in Canada, the world political scene looked pretty grim: A possible spread of the European debt problem seemed to confirm a new contagion, and the U.S.debt rating was under review as politicians squabbled over raising the debt ceiling. And now? Not a thing has changed, but the stock market appears to be taking all of this in stride as bad news is being ignored and stocks appear to be firming up.
The most widely followed of the broad-based indices, the S&P 500, held at its downward sloping (red dashes) former bearish resistance line (now bullish support line), and the conjunction of the 20-day and 50-day moving averages and the MACD indicator flashed a buy signal. This is positive, but the real test is just ahead. The black dashes at 1,345 are at the center of the most significant resistance of the year in a wide trading range that has a bottom at around 1,260.
The Dow Jones Industrial Average also held at an important support zone — 12,390 to 12,450. But the greater significance of last week’s action is that the index exceeded its July 7 high, preserving an intermediate uptrend and supporting the possibility that the Dow industrials and Dow Jones Transportation Average are both headed higher. This view is supported by the positive signal from the MACD internal indicator.
Even though the Dow transport index briefly fell below its 50-day moving average and resistance line, it quickly reversed course and closed the week above both lines while finding minor encouragement from an upward arching MACD.
The financial sector via the Financial Select Sector SPDR (NYSE:XLF) has been a drag for the entire year, and one week ago it was heading for a test of its June lows. On Monday, it briefly broke its support only to reverse and run through the important resistance at its 50-day moving average — closing above the blue line on both Thursday and Friday. This dramatic reversal triggered a buy signal from MACD.
Despite an opportunity to establish a base, the U.S. dollar as represented by PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) gapped down on Thursday challenging the May low even as the financials rallied. This triggered a new sell signal from UUP’s MACD, and now there is a strong possibility that the dollar will hit another new low driving both stocks and commodities higher.
Conclusion: The market may be telling us that despite the political rancor over the debt ceiling, most investors believe that a deal will be struck before the August deadline. If this happens, look for a brief but potentially powerful rally that could challenge the old highs.
Long trades should be placed early this week and sold shortly after the announcement of a budget deal to take advantage of a quick run higher. However, “Buy on the rumor, sell on the news” is timely advice since very little will have changed despite all of the hoopla.
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.
