Yesterday, investors’ focus shifted again to Europe, and especially to Italy where a new government took over during the weekend. But the bond markets weren’t kind to the new government, and its 10-year bond rose to over 7% — a level of debt service that the country cannot sustain.
As a result, Europe’s major bourses sold off by 1%, andU.S. markets followed with a loss of 0.61% on the Dow Jones Industrial Average, 0.91% on the S&P 500, and 0.8% on the Nasdaq. Volume was light with just 709 million shares trading on the NYSE and 375 million on the Nasdaq. Decliners outnumbered advancers on both exchanges by over 3-to-1.
At first glance it looks like the technical pattern of the Dow has not changed much in the last week. The index is still range-bound between 11,650 and 12,200. But two changes are worth noting:
1. The index has been able to maintain a level above the 200-day moving average while still failing to establish a clear near-term direction.
2. It flashed a MACD bearish signal on Nov. 9, which brought that internal indicator in line with the momentum and stochastic indicators that were previously reported.
On the other hand, the Nasdaq, which has been the market’s leading index since the October low, has so far failed to hold above the 200-day moving average following its two failed attempts. It too issued a MACD bearish signal, but with much more clarity and gusto than the Dow.
The movement of stocks is inversely related to the movement of the U.S. dollar versus the euro. Following the sell-off of the buck in late October, the dollar staged a strong rally as buyers flocked to its characteristic safety compared to the euro.
Despite the extremely volatile conditions, the dollar has successfully held above the 200-day moving average (red line), and yesterday closed over its 50-day moving average (blue line). These are bullish indicators for the dollar but bearish for stocks.
Conclusion: The European situation is far from stable, and foreign funds are flocking to the dollar and to higher quality investments. This explains the difference in relative performance between the Dow Jones Industrial Average, a group of 30 investment-grade stocks, compared to the Nasdaq, which is populated with more speculative issues, heavy in banks and technology stocks. Both indices are still trading within a narrow band, but both have also issued a bearish MACD signal, and both retain sell signals from the other internal indicators.
The result of this week’s economic reports could break stocks from their narrow range, but the charts are telling us that the news will probably push equities lower. If you’re looking to make money on the next leg down, you should check out my colleague, Joe Burns.
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.
