A news-focused stock market turned its attention to Europe again yesterday, when reports that the German chancellor could see no immediate resolution to the European economic crisis. That, coupled with disappointing earnings from Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC), set up the stock market for a lower opening.
And so from the opening bell to the close, the bulls were crushed yesterday with a steady flow of sell orders. Even though volume was low with just 904 million shares trading on the NYSE, sellers outnumbered buyers by about 4-to-1. It was a straight line down for each of the major indices until just before 3 p.m., when a few buyers poked their heads above the trenches, but they were overwhelmed by more selling that continued to the final bell.
Volatility returned yesterday with the CBOE Volatility Index (VIX) jumping 4.65 to 32.89. This puts the index back into a range that is generally considered to be a near-term negative for the market.
Yesterday’s refusal to advance farther into the 1,220 to 1,230 resistance zone provides support for the theory that a broad trading range of 1,120 to 1,230 has been established, and that zone could be with us for some time. The first support within the range is at the 50-day moving average at 1,173 (blue line) and the 20-day moving average at 1,167 (green line). But expect full swings from 1,230 to 1,120 over the next couple of months.
Many analysts had been depending upon the technology sector to bail out the market. However, it is clear that the Russell 1000, which is weighted to technology stocks, is in no better condition than other indices. Note the clear trading rectangle and the declining hook on its stochastic.
After the close, IBM (NYSE:IBM) fell short of estimates, raising serious questions about technology’s ability to stabilize the market. If “Big Blue” can’t make it, who can?
Conclusion: The inability of the market to sustain a rally beyond the bounds of a trading rectangle most likely limits both advances and declines. But it provides traders with clear boundaries, and that could encourage more of the hyper trading that has whipped stocks into frenzies of high volatility since August. Expect more of the same.
And if you’re interested in some specific options trades to play this market, check out my colleagues Chris Johnson and Jon Lewis.
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.
