Yesterday stocks were down initially on reports that several French banks might be hit with a downgrade. And for most of the day the Dow Jones Industrial Average was off by over 1% as the news shifted to another European problem — the strong possibility of a default on Greece’s debt. But 45 minutes before the close the market violently reversed course when Italytook center stage — this time due to a report from the Financial Times thatChina was in talks that could lead to a “significant” purchase of Italian bonds — and stocks closed with gains.  

But despite the chaotic jerking around and a higher close by stocks, more technical damage preceded the turn higher. The U.S. dollar broke through its 200-day moving average on a breakaway gap — an important technical signal backed by high volume and a strong MACD indicator.

The breakout by the dollar does not bode well forU.S.stocks or commodities as there is much data to link strength in the dollar to weakness in many markets. Most recently, from August 2008 to November 2008, the dollar rose and stocks and futures plunged lower.

Nevertheless, the injection of Chinese capital intoEurope’s financial woes could temporarily put the brakes on talk of further contagion and ease the pressure on European stock markets. And yesterday’s technical reversal of the major U.S. indices could lead to a rally in stocks similar to the rally in early August that drove stocks to the upper resistance line of the bearish flag formation.

The first barrier to such a rally is the 20-day moving average at just under S&P 500 1,177, only points from yesterday’s close and an easy target — that is if the sudden reversal has legs. If not, the indices will find it difficult going and most likely turn lower, even leading to a sudden collapse.  

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.

• See Serge Berger’s Daily Market Outlook: Why the Current Market is too Dangerous for Investors
• See Sam Collins’ Trade of the Day: Get Out of This Semi Stock Now
• See Serge Berger’s Trade of the Day: Fast Trade in TXN Could Pay Off