Stocks Encounter Stubborn Resistance


Friday, July 16, 2010
Stock Market Commentary:

Friday’s plunge negated the week’s gains as investors digested a slew of economic and earnings data. As expected, volume was reported higher than Thursday’s session on both exchanges due to options expirations. There were only 4 high-ranked companies from Leaders List that made a new 52-week high and appeared on the BreakOuts Page, lower than the 16 issues that appeared on the prior session. Decliners trumped advancers by nearly a 4-to-1 ratio on the NYSE and over a 7-to-1 ratio on the Nasdaq exchange. New 52-week highs solidly outnumbered new 52-week lows on the NYSE but trailed on the Nasdaq exchange.  For the rally to have ongoing success it will be critical for a healthy crop of leaders to continue showing up hitting new 52-week highs.

Monday- Wednesday’s Action: Earnings Season Begins; Stocks Edge Higher:

The major averages ended slightly higher on Monday after spending most of the day trading between positive and negative territory ahead of Alcoa Inc’s. (AA -3.97%) Q2 results. After Monday’s closing bell, the largest US aluminum company kicked off earnings season and reported a profitable Q2 and said sales rose +22%. Stocks enjoyed hefty gains on Tuesday after the government said the trade deficit topped $1 trillion. Technically, it was encouraging to see the Dow Jones Industrial Average rally above its 50-day moving average (DMA) line and rise above a downward trendline. Tuesday’s gain also helped the S&P 600 Small Cap Index rally above the April – June downward trendline shown above.  The benchmark S&P 500 Index is now challenging its 50 DMA line, yet it faces resistance at its short-term average and it also remains trading under its 200 DMA line. The Nasdaq Composite Index has rallied very near its 50 and 200 DMA lines which have now converged.  The NYSE Composite Index, which was noted in this commentary recently as the first major index to violate its 50 DMA line and the see its 50 and 200 DMA lines form a “death cross”, rallied for its first close above its 50 DMA since May 3rd. However, it was disconcerting to see the week’s gains erased by Friday.

On Wednesday, the major averages ended mixed to slightly higher as they consolidated Tuesday’s large move.The benchmark S&P 500 Index snapped a streak of 6 straight gains after retail sales fell last month and the Fed released the minutes of its latest meeting. The Commerce Department said retail sales fell -0.5% last month which topped the Street’s estimate and followed a -1.1% decline in May. Most of the decline came from the ailing automobile sector, excluding auto dealers, demand fell -0.1% which matched the median estimate. Elsewhere, the Federal Reserve released the minutes of its latest meeting which showed a less than stellar economic outlook. Fed officials said the economy has “softened” which sparked concern of a double dip recession.

Thursday & Friday’s Action- Stocks Fall After Encountering Stubborn Resistance:

On Thursday, stocks erased earlier losses and closed near their intraday highs as investor’s digested a slew of important data: JP Morgan (JPM -3.61%) reported their latest quarterly result, weekly jobless claims and producer prices fell, Goldman Sachs (GS +0.65%) settled with the SEC for $550 million, BP (BP-4.68%) plugged the broken well, the Senate sent President Obama the largest financial regulatory bill since the Great Depression, and the latest read on the manufacturing industry was disappointing. It was somewhat encouraging to see the market shrug off earlier weakness and close near its intra-day highs even though the Nasdaq Composite Index and the Dow Jones Industrial Average snapped 7-day winning streaks. Stocks closed lower on Friday after Citigroup (C –6.25%) and Bank of America (BAC -9.16%) released their latest quarterly results while consumer confidence and consumer prices both fell.

Market Action- Rally Under Pressure:

Since the current rally began on July 1, the major averages have rallied on suspiciously light volume, leadership has been very light and resistance has held firm- all unhealthy signs. This ominous action suggests another pullback may be in the cards. That said, patience and caution are of the utmost importance until the major averages close above resistance.

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