Stocks opened steady yesterday, and trading was flat until the Fed’s decision to leave rates unchanged.
A brief but sharp rally followed the announcement, which drove the major indices to new highs for the year. But the rally failed to gain enough momentum to carry it to the close, and profit-taking took out the morning support, leaving sellers to themselves for the last half hour of trading.
The Dow Jones Industrial Average (DJI) ran to an intraday high of 9917.99 at 2:40 p.m., up 80 points for the day, but reversed and fell to end up with an 81-point loss.
JPMorgan Chase (JPM) fell 3%, Caterpillar (CAT) was off 2.21%, and Pfizer (PFE) fell 2.20%.
The sharp reversal caused a jump of 1.78% in the CBOE Volatility Index (VIX), an index that is used by traders to measure volatility in the markets.
Energy stocks were weak, even before the Fed’s announcement, and finished off 1.9%. A bearish oil inventory report was blamed for the fall, as a rise of 2.8 million barrels surprised traders. Demand was off 3.3%, the lowest level since June 26.
As for the Fed’s announcement, Chairman Ben Bernanke had commented earlier that it appears that the recession is over. Thus, the confirming news yesterday that “economic activity has picked up following its severe downturn” was no surprise. The central bank’s rate-setting panel voted 10-0 to keep the target for its Fed funds rate for interbank lending at a record low range of zero to 0.25%.
At the close, the Dow fell 81 points to 9,749, the S&P 500 (SPX) lost 11 points to 1,061, and the Nasdaq (NASD) fell 15 points to 2,131.
Volume on the NYSE totaled 1.3 billion shares with decliners ahead by just short of 2-to-1. The Nasdaq traded 796 million shares with decliners ahead by 8-to-5.
As noted above, crude oil fell yesterday on weak demand and growing inventories. The November contract fell $2.79 to $68.97 a barrel, and the Energy Select Sector SPDR (XLE) lost $1.16 and closed at $54.41.
December gold fell $1.10 to $1,014.40 an ounce, and the PHLX Gold/Silver Index (XAU) lost $5.27 to close at $164.59.
What the Markets Are Saying
Even though volume was not high, the major indices recorded reversals, and the Dow and Nasdaq triggered our own internal Collins-Bollinger Reversal (CBR) to issue a sell signal.
It should be no surprise to most that the markets could pull back some after weeks of gains. But the volume was relatively light, and the selling all came at the very end of the day, which is a pattern for normal profit-taking rather than a serious trend reversal.
One of our “most watched” sentiment indicators, the American Association of Individual Investors (AAII) sentiment survey, last night reported that the public has switched to being bearish again by 44.55% to 39.09% bullish. This is not a big change, but it does show an increase in fear among the public, and that, too, is usually bullish.
As for the CBR, its signal must be tested for three trading sessions before becoming valid, and if the signal is reversed back up within those three days, then it could become a powerful buy signal. We’ll just have to wait this one out.
Yesterday I posted the first support for the Dow, the S&P 500 and the Nasdaq at their respective 20-day moving averages, so let’s bring them up-to-date following yesterday’s action: The Dow’s 20-day moving average is at 9,594, the S&P is at 1,039, and the Nasdaq is at 2,064.
The next resistance for the S&P 500 is at the key Fibonacci 50% retracement of the bear market at 1,120. But our longer-term target remains at 1,245.
Today’s Trading Landscape
Earnings to be reported: 3Com Corp. (COMS), Analogic Corp. (ALOG), Chattem (CHTT), Christopher & Banks (CBK), Finish Line (FINL), McCormick & Co. (MKC), Neonode (NEON), Research In Motion (RIMM), Rite Aid Corp. (RAD), Steelcase (SCS), Texas Industries (TXI) and Vail Resorts (MTN).
Economic reports due: jobless claims (the consensus expects 550,000), DJ-BTMU U.S. Business Barometer, existing home sales (the consensus expects 5.35 million), EIA natural gas inventories, Kansas City Fed Manufacturing Survey, money supply and Fed discount window borrowings.
The old ways of investing don’t work anymore. But trading options founded on scientific principle can and does work in volatile times like these. Learn how to leverage the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!
