Reversal Day

Thursday marked a big reversal for the markets. In the morning the Dow Jones Industrial Average was up over 120 points. The S&P 500 was up almost 13 and the NASDAQ composite was up over 33 points. Both the NASDAQ and the S&P closed lower for the day, on higher trading volume than Wednesday. That alone marks a distribution day. However when markets reverse off highs for the day that are 1 to 1 ½% higher than the day before, the technical term for that kind of action is a reversal day.

Reversal days, like any technical indicator, don’t guarantee anything. They should create an awareness that the current trend could be changing. How big of a change is yet to be determined.

In my previous posts I stated that the market is overbought on many levels. Combine that knowledge with today’s reversal and it creates an environment that will be interesting to observe over the next week or so.

The US dollar has broken out to the upside. While that is a good thing for individual Americans, there has been an inverse relationship between the US dollar and the stock market, plus precious metals and commodities. Meaning – should the US dollar continue its climb those other asset classes may start to decline.

The final note has to be US Treasuries. They have really taken a hit over the last couple of days. There were two auctions over the last couple of days. To raise enough money to cover our collective debt, the treasury had to pay extra yield. If the cost of money does start to rise as dramatically seen yesterday and today, that could be a bad thing for everybody. We’ll keep a close eye on Treasury bond prices as well over the next week as well. Higher yields equal lower prices.

This does not mean the bullish bias is gone. It does raise the caution flag a bit higher to watch out as there are some real negatives out there that could potentially stall the markets recovery.