Quick Pop May Reward Buyers

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A lack of new financial developments from Europe led to a quiet day of trading yesterday. The euro gained versus the U.S. dollar, which resulted in a mildly positive response from stocks with the Nasdaq leading a minor recovery — up 1.5% on average volume and with breadth at a positive 3-to-1.

Nasdaq Bear Flag ChartTrade of the Day Chart Key

Yesterday’s advance within the Nasdaq bear flag that I first identified on Sept. 5 is still intact. But there are two characteristics of this flag that bother me. First, flags that extend for more than three weeks without breaking down “are open to question” (Edwards and Magee). This flag started the first week in August, and so it may be tiring. Second, our internal indicator, the Collins-Bollinger Reversal (CBR), flashed a buy signal on Friday, followed by an up day yesterday that closed above the 20-day moving average.

Additionally, the Nasdaq closed just below its bearish resistance line — a line that defines the current intermediate downtrend – that, if penetrated, could put pressure on the 50-day moving average at 2,622 (blue line).

SPX Flag ChartTrade of the Day Chart Key

The bear flag for the S&P 500 is similar to the Nasdaq’s with the exception that its 20-day moving average has not been exceeded, and the bearish resistance line and 50-day moving average are not nearly so vulnerable since they are farther away from yesterday’s close than the Nasdaq’s.

Nasdaq Neckline Break ChartTrade of the Day Chart Key

But before the bear transforms into a bull, let’s remember that focusing on the reversal from the support line of a bear flag is a near-term exercise. Short-term traders may want to play the long side for a quick pop and quick return. Short sellers would be wise to place protective stops in order to reduce a loss resulting from a short-covering rally. But trading against an overall trend is like swimming upstream — you may make some temporary headway, but with the current against you it is hard to make a meaningful advance.

Conclusion: By focusing on the near term, let us not forget that overhanging the entire market is the confirmed neckline break of a head-and-shoulders top — a major negative formation that signals an important change in trend. Since that breakdown, both the long-term and intermediate trends are down with the S&P 500 plunging 19% from the July 7 high. It is important to keep in mind that neckline breaks are often followed by deceptive rallies that sometimes even run up and through the neckline before reversing down and crushing the optimists who were drawn into what seemed to them to be a direction-changing rally.

Let’s not lose our perspective: Yesterday was a day of rest from the high probability of a default by Greece, new debt concerns about Italy, and a weakening European economy — and nothing more than that. And even if the European banks are supported by QE-type programs, rallies caused by government intervention usually have little long-term impact.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2011/09/daily-stock-market-news-quick-pop-could-reward-buyers/.

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