Is This a Bear Trap or a Wounded Bull?

Two key headlines had an impact on U.S. stocks yesterday. First, the Fed, after
identifying Europe's problems as a major risk to the U.S. economy, took no
immediate actions. Second, retail sales data grew less than expected in November
despite a recent jump in consumer confidence. And so even though we were focused
on the Fed's report, it turned out that Europe became a greater concern to Fed
members. They even cautioned that a "return to more-sluggish growth is likely,
particularly with a recession brewing in Europe." Many expected Chairman
Bernanke to announce a new type of QE3, but when that didn't occur the markets
went into a nose dive. The Dow Jones Industrial Average fell 0.55%, the S&P 500
lost 0.87%, and the Nasdaq was down 1.26%. Volume was again low with the NYSE
trading 926 million shares, and the Nasdaq crossing 487 million shares. Breadth
was negative on both exchanges. Decliners on the NYSE outnumbered advancers by
1.5-to-1, and on the Nasdaq, decliners were ahead by over 3-to-1. Click to
Enlarge The Nasdaq, the index that has consistently been the market leader, both
up and down, broke the support line at its 50-day moving average and fell from a
two-week trading range. It also sliced through the psychologically important
line at 2,600 and received a sell signal from the stochastic. The last time that
the Nasdaq violated these support lines was in November when it plunged to
2,450. Now that mark provides the support point for the bottom of a triangle
with resistance at around 2,650 and support at 2,485. Thus, 2,485 to 2,500 is
the next target following yesterday's serious breakdown. Click to Enlarge The
PowerShares US Dollar Index Bullish Fund (NYSE: UUP ) has been in our focus for
months as a primary indicator of near-term moves. Yesterday's break through a
triple-top on a positive buildup in volume is a negative indicator forU.S.
stocks. The only remaining barrier is October's high at $22.62.