Saber-rattling by North Korea, along with the persistent European debt crisis, resulted in an explosion of selling on Tuesday’s opening bell. Stocks quickly gapped 3% lower with 95% of the S&P’s 500 stocks showing losses, and both the S&P 500 and the Dow Jones Industrial Average falling to seven-month lows.

But the major indices’ reversals from technical support zones, and the release of a much better-than-expected May consumer confidence number, turned the markets from their triple-digit lows.

And later, when CNBC reported that Representative Barney Frank said the new financial reform bill provisions for derivatives goes too far and will more than likely be modified or even dropped, buying picked up in earnest. 

As a result of Frank’s comments, the bank stocks turned on a dime with heavy buying focused on the big-cap banks. By the close, Goldman Sachs Group Inc. (NYSE: GS) had risen 4.3%, Morgan Stanley (NYSE: MS) was up 1.4%, and Bank of America Corporation (NYSE: BAC) gained 0.6%.

The Case-Shiller home price index showed that U.S. home prices rose 2% in Q1 from the prior year. The Federal Reserve Bank of Richmond said economic activity in the central Atlantic region grew more slowly in May.

Treasury prices fell slightly. The 10-year note’s yield fell to a one-year low of almost 3.1% early in the day, but recovered to nearly 3.15% at the close.

At the close, the Dow fell 23 points to 10,044, the S&P 500 was unchanged at 1,074, and the Nasdaq fell 3 points to 2,211. 

The NYSE traded 1.9 billion shares with decliners ahead of advancers by just under 2-to-1. The Nasdaq crossed 857 million shares with decliners ahead by 2-to-1.

Crude oil for July delivery fell $1.46 a barrel to $68.75 on fears of a continued downturn in Europe and a slowing of demand. The Energy Select Sector SPDR (NYSE: XLE) rose 12 cents, closing at $51.98. 

Gold (June contract) rose $4 to $1,198 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 5.14 points to 171.2.

What the Markets Are Saying

Yesterday’s wild opening drove through the most recent buying zones that triggered reversals on Feb. 5, May 6, and May 21, even exceeding the low of February by about 4 S&P points. The press said the selling was caused by fear of a “contagion” of debt problems in Europe and threats by North Korea of war against its neighbor to the south.

So far, the selling has been contained by institutional buying, and yesterday institutional commitments even resulted in a reversal by the S&P 500. But history tells us that support zones are only as strong as those willing to commit big money in a plan to buy stocks at gradually lower prices. And those buyers cannot provide resources for an unlimited number of sell-offs. In fact, after three or possibly four thrusts into a zone of support, buyers will usually back off until the next major support line is reached.

Yesterday’s reversal, as dramatic as it was, will probably yield another bounce today. The area of resistance to an advance is the 200-day moving average at 1,105, and if that is successful, it could even advance to the major resistance at 1,115 to 1,150.

But let’s not fool ourselves, some very serious technical damage has occurred, and unless the buyers are able to mount a solid attack with increasing volume on the 1,150 area of the S&P 500, the near-term and intermediate-term trends will remain down. 

It is important to note that yesterday’s buying occurred at a lower level than that of any prior reversal. This tells us that money committed to stocks at the S&P 500’s 1,030 to 1,045 level has been seriously diminished. And there has no evidence of an increase in volume on any serious rally since early in March.

Therefore bulls should only buy on prices that match extreme sell-off levels, and rallies should be viewed as excellent opportunities to lighten on weaker positions until the market stabilizes.

Today’s Trading Landscape

Earnings to be reported before the opening include: American Eagle, BluePhoenix, Brown Shoe, Diana Shipping, Fred’s, LTX-Credence, Solarfun Power, Sycamore, Synovis Life Technologies, Toll Brothers and Zale Corp.

Earnings to be reported after the close include: AFC Enterprises, Avago Technologies, Dress Barn, Hoku Scientific, Jo-Ann Stores, NetApp, rue21, Semtech, Sigma Designs and VeriFone.

Economic reports due: MBA purchase applications, durable goods orders (the consensus expects 1.5%), new home sales (the consensus expects 425,000), and EIA petroleum status report.

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