Market Trapped in Trading Range

U.S. stocks opened higher on Monday, reacting to stronger economic results and higher markets in Europe and Asia. Positive comments from a key Federal Reserve governor helped prices through noon, but when Greece’s debt was downgraded, stocks took back all of their gains and ended the day mixed.

Moody’s downgrade of Greece’s bonds was late in coming, since S&P and others had downgraded them earlier. But the cut in rating to Ba1 from A3 hurt the euro bond markets, and despite a pledge by Greece’s prime minister that the country would not leave the euro, the downgrade brought back recent memories of chaos in the securities markets.

The euro zone said that industrial production rose by 0.8%, which was better than expected. The euro was higher versus Friday’s close, and the U.S. dollar index was off 1%.

Financial stocks lagged the broad market for the entire session. Investment banks led the group lower with a loss of 2%. The sector fell 0.7%.

At the close, the Dow Jones Industrial Average (DJI) was down 20 points to 10,191, the S&P 500 (SPX) fell 2 points to 1,090, and the Nasdaq (NASD) rose fractionally to 2,244.

The NYSE traded 1.1 billion shares with advancers over decliners by almost 2-to-1. The Nasdaq exchanged 521 million shares, and advancers were ahead by 4-to-3.

Crude oil for July delivery rose $1.34 to $75.12 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell 28 cents to $55.39.

August gold fell $5.70, closing at $1,224.50 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 2.66 points to close at 172.65.

What the Markets Are Saying

Tuesday’s [June 8] reversal from the S&P’s 1,050 area must be considered the third successful test of that support line since May 21. The other major indices also met the criteria for a successful test with the Dow holding above the 9,750 area, and the Nasdaq holding its 2,140 line.

But with heavy volume down and light volume up, it didn’t feel like a successful test. And neither did yesterday’s failure to successfully attack the 200-day moving averages help the bull’s cause. Both the Dow and the S&P 500 turned aside from their 200-day like it was hot branding iron, and even though the Nasdaq held comfortably above it for most of the day, it only managed to close over it by 3 points.

Despite an encouraging attack early in the day, Monday’s session ended mixed as the markets asserted the importance of the resistance at the 200-day moving averages. The major indices are currently compressed between the resistance at their respective 200-day moving averages and the support at the February/May/June lows. For the S&P 500, the top is at 1,109, and the support is around 1,040.

Longer-term analysis doesn’t do much for the optimists either, since the 50-day moving averages of the major indices are now falling rapidly.

For the S&P that line is now at the early January resistance of 1,150. Even if the index were to break through the resistance at 1,109, the broad resistance from 1,115 to 1,150 could provide a barrier that might not only halt a further advance but could even provide for a right shoulder in a massive head-and-shoulders top.

But let’s not get ahead of ourselves. For now, the indices must cope with a narrow trading zone that shows few signs of breaking up or down.

Today’s Trading Landscape

Earnings to be reported include: Canadian Solar, FedEx and IHS.

Economic reports due: bank reserve settlement, MBA purchase applications, housing starts (the consensus expects 650,000), producer price index (the consensus expects -0.5%, and 0.1% ex-food and energy), industrial production (the consensus expects 1%, and 74.5% for the capacity utilization rate), and EIA petroleum status report.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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