The euro crisis took center stage again yesterday as rumors flew on whether there would be a referendum in Greece. Stocks opened lower on the “would be” rumor, and then rallied when it was announced that a referendum would be “put aside.” The European Central Bank (ECB) cut their key lending rate by 25 basis points, and a modest drop in U.S. jobless claims put the S&P 500 back onto the plus side for the year.
The Dow Jones Industrial Average gained 1.76%, the S&P 500 was up 1.88%, and the Nasdaq rose 2.2%. Volume had a modest increase with just over 1 billion shares trading on the NYSE, while the Nasdaq crossed 574 million shares. Advancers were ahead of decliners on both exchanges by about 3-to-1.
The interest rate cut by the ECB caused an early rally in the U.S. dollar, punching the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) above resistance at its 50-day moving average at $21.73, its 200-day moving average at $21.63, and the resistance/support line splitting the two averages. Bullish gaps support a higher move in the buck, as does the MACD indicator, and a continuation of the higher opening might have occurred had it not been for the cancellation of the Greek referendum.
The S&P 500 closed a fraction above the breakout line (old neck line) at 1,261 setting the index up for an attack on the 200-day moving average at 1,273. But the sole reason for yesterday’s advance was the Greek story, which resulted in another day of high volatility — just the sort that turns investors into traders. The MACD internal indicator flashed a sell signal, which is in agreement with the buy signal on the dollar, and for months there has been an inverse relationship between stocks and the dollar.
Following up on yesterday’s discussion of volume: Two big days down and two days up produced a volume imbalance, which is in favor of the bears. Volume down totaled 2.7 billion shares versus 2 billion shares.
Sy Harding of Street Smart Report Online had an interesting observation yesterday about the extraordinary volatility since August. He mentioned the spike up of 501 Dow points in two days last week followed by 573 points down in the first two days of the month and correctly observed that although the financial press loves to note that it was the biggest day up, or the biggest three days downs, etc., it is all meaningless and only adds to the emotional reaction of viewers. He listed a string of big-volume days from Aug. 9 to Sept. 22, and concluded, “while each move was exciting at the time, they did not even move the market out of the sideways trading range until late last week’s spike up. And even that reversed this week.”
Advice for day traders: The message is simply to use daily swings to your advantage and don’t hang around long in any trading position. (For real-time, intraday trades, click here.)
There is nothing wrong with taking a small loss to avoid a big one. Try not to chase intraday runs but go against the trend. For example, yesterday’s opening gap up was a great shorting opportunity provided that you covered 30 minutes later at Tuesday’s uptrend line at just below 11,850. Those who went long at the uptrend line at 11,850 ended up with a huge gain for the day — if they closed out their positions before the 4 p.m. bell. Smart traders do not hold positions overnight.
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.
