The Pattern That’s Still Haunting the Market

Yesterday, a news-oriented stock market was dominated by wild swings that
resulted from corporate earnings and European plans to recapitalize their banks.
With each announcement, the market surged higher, and it was so chaotic that
several times buyers emerged on bad news as well as good. Late in the day, The
Guardian reported thatFrance andGermany agreed to increase the size ofEurope's
rescue package by 2 trillion euros. The Dow ignited for 160 points, but the
story's authenticity was questioned and much of the gain was lost in the last
minutes of trading. Financial stocks led all others yesterday, up 5% despite an
earnings miss by Goldman Sachs (NYSE: G S), which gained 5.5%. Technology gained
1% even though IBM (NYSE: IBM ) fell in the face of better-than-expected
earnings, and Apple (NASDAQ: AAPL ) and Intel (NASDAQ: INTC ) had small gains in
anticipation of higher earnings to be reported after the close (AAPL missed its
target and Intel exceeded). Despite the volatility and focus on news, volume
improved only slightly. The NYSE traded less than 1.1 billion shares, and the
Nasdaq crossed 553 million. Advancers were over decliners by about 4-to-1 not
the stuff that breakouts are made of. The U.S. dollar has fallen for almost two
weeks, while European politicians have tried to put a better face on their debt
crises. But yesterday's late-day uncertainty on the size of a bailout package
could stabilize the dollar at its breakout line and 200-day moving average. The
stochastic issued a buy yesterday, and selling volume rose, perhaps indicating a
selling climax. Watch the dollar early today for a clue as to its next move
since a strong dollar would, as before, put pressure onU.S.markets. The
Nasdaq's chart is forming a pattern that is looking more like a continuation
of the bear flag that has haunted it since early August. By extending into the
resistance zone above 2,600, it has made a new high within the pattern. The next
major resistance is at the line that bisects its 200-day moving average at
2,693. Despite lots of fanfare, yesterday's close failed to match Friday's
closing high of 2,668, and its intraday high at 2,667 failed as well. With
mediocre volume and only average breadth, the Nasdaq, like the other indices, is
looking very tired. Meanwhile, the Dow and S&P 500's trading rectangle is
intact. The significance of a rectangle is that, in most cases, it is a
consolidation within the overall pattern. In other words, in a bull market
prices finally break to the upside. But we are in a bear market, so look for a
failure to penetrate the resistance at Dow 11,717 and S&P 1,230 ( see
Thursday's Daily Market Outlook charts ). We remain in the bear camp and on
the defensive. If you're looking for ways to play this through options, click
here . Todays Trading Landscape To see a list of the companies reporting
earnings today, click here . For a list of this weeks economic reports due out,
click here .