Market About to Get Clubbed

By Sam Collins,

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Stocks rallied again yesterday, rising more than 2% in a broad-based advance that generally mirrored the gains made on the European exchanges. For example, Germany's DAX gained 2.4%.

Technology stocks led the Dow following a 4.56% gain in IBM Corporation (NYSE: IBM ). Big Blue was the subject of heavy buying after its CEO said that the company would double its earnings to at least $20 a share by 2015. Because IBM is the highest-priced stock in the Dow Jones Industrial Average ( DJI ), it has a leveraged impact on the index.

Other blue-chip components were higher, as well, with Intel Corporation (NADDAQ: INTC ) up 3.6%, Cisco Systems, Inc. (NASDAQ: CSCO ) up 3%, Hewlett-Packard Company (NYSE: HPQ ), up 2.4%, and Microsoft Corporation (NASDAQ: MSFT ) rising 1.9%. The technology sector gained 2.2%.

New Coming Soon!

Retail stocks were weak early in the session, but Macy's, Inc. (NYSE: M ) posted better-than-expected earnings and led the group to a gain of 1.4%.

Even as the Senate was debating new restrictive legislation on mortgage underwriting rules, most banks gained, but some large banks fell, perhaps, reflecting the debate going on in the Senate that could result in more restriction specifically on: JPMorgan Chase & Co. (NYSE: JPM ) which fell 0.3%, and Bank of America Corporation (NYSE: BAC ), which was off 0.5%.

Gross Domestic Product ( GDP ) growth in the 16 countries in the European Union rose 0.2% in Q1, up from 0.0% in Q4. The report was slightly higher than expected.

At the close, the Dow gained 148 points, closing to 10,897, the S&P 500 ( SPX ) gained 16 points to 1,172, and the Nasdaq ( NASD ) gained 50 points to 2,425. 

The NYSE traded 1.3 billion shares with advancers above decliners by over 5-to-1. The Nasdaq traded 631 million shares, and advancers exceeded decliners by over 4-to-1.

June crude oil fell 72 cents to $75.65 a barrel as a growing oil glut in the United States cut into prices. The Energy Select Sector SPDR (NYSE: XLE ) rose 79 cents and closed at $57.75. 

Gold for June delivery hit a new record high, and the contract closed at $1,243.10 an ounce, up $22.80, as concerns continued over the inflation that might result from the eurozone bailout. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) closed at 186.06, up 1.81 points.

What the Markets Are Saying

It didn't take long for buyers to jump on the quirky prices of last week, driving the key indices to their former breakdown level. That level -- the 50-day moving average -- is important to technicians as a major support/resistance indicator, so when it is violated, sellers will often act solely on the basis of its penetration.

But the dramatic plunge of last Thursday was not the result of a technical sell-off, but a failure of systems that no one seems able to explain. When a "glitch" of that magnitude occurs, it fouls up the data on which we depend for a number of technical indicators. So technicians must draw upon past experience more than data for guidance.

And here's the way I see it: Breakdowns through major moving averages most often signal that a change in trend is under way. In this most recent event, the breakdown occurred before the "the glitch" and, therefore, we should stick with the premise that the sell signal of May 5, the day before the plunge, had validity. The spring back is not uncommon, and often occurs giving investors another chance to sell at prices not available just days before when panic hit the Street. 

So, until the 50-day moving average is violated and then validated by a close above the 20-day moving averages of the major indices, we will maintain our sell signal. It is much more than coincidence that rising prices were stopped yesterday exactly on the 50-day moving average of the broad-based index , the S&P 500, or just slightly above it for the Dow and Nasdaq.

And it is interesting that the broad-based index that, for me, has been an invaluable tool, closed yesterday at a considerable distance from its 50-day moving average. That index is the NYSE Composite, which, in addition to not reaching the 50-day, even triggered a trading sell signal as its 20-day moving average crossed through its 50-day moving average. 

The long-term trend is still up, but both the short-term and intermediate-term trends are down. The cat is still bouncing, but he is about to be whacked by sellers waiting just above him with a big club.

Today's Trading Landscape

Earnings to be reported before the opening include: ADA-ES, American Superconductor, Argon ST, CAE, China Green Agriculture, E-House China, Elbit Systems, Gildan Activewear, Kohl's, O'Charley's, Prestige Brands, Teekay Shipping, Urban Outfitters, VanceInfo Technology and Wendy's.

Earnings to be reported during trading hours include: Tim Hortons.

Earnings to be reported after the close include: Addus HomeCare, Black Box, Blockbuster, CA, Chemspec International, Cumberland Pharmaceuticals, Exar, ICx Technologies, Medidata Solutions, Nordstrom, NVIDIA, Quantum, Select Medical and Syneron Medical.

Economic reports due: jobless claims (the consensus expects 440,000), import and export prices, EIA natural gas report, Fed balance sheet and money supply.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Stocks

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Sam Collins

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