Tuesday SUMMARY: May 18, 2010

After watching yesterday’s chart action, you might think that the rebound from negative 184 points to a close on the plus side would indicate that the recent market bearish mood was finally subsiding and the correction was over.

Many times, a corrective phase will end on what is called a “key reversal” day where stocks start the day down hard in reaction to some news relating to whatever the current crisis is focused on, but then reverse higher on strong volume. This trading activity usually means the recent declines have fully discounted whatever bad news may still be out there.

While it is true that stocks did erase an early 184 point loss on the Dow and managed to claw their way back into the plus column by the time the closing bell rang, there are a couple of problems with labeling yesterday’s action as a Key Reversal day. First and foremost, the volume component of the formula for a “key” reversal just wasn’t there.

It would appear that yesterday’s rebound was really all about the Euro. It appears as if traders were merely tying their activities to the fate of the EU’s currency. So, while the market could easily head higher from here, it is important to understand that the stock market’s future appears to be tied to the fate of the Euro at the present time.

Investors currently view the Euro as a proxy for confidence in the economies of the EU. For obvious reasons, the Euro has been diving lately as investors fear the EU/IMF bailout simply won’t be enough and that civil/political unrest may cause the EU to fall apart. In the last 10 trading days alone, the Euro has fallen more than -6% and was once again making a new low yesterday.

However, right about noon eastern time Monday, the Euro suddenly found its footing and began to rise. And in short, the stock market indices followed suit.

Today we got our answer as the Euro got drubbed again setting an intraday four year low of $1.2127 and closing at $1.2176 down .0172 for the day. Once more the Euro weekness resulted in the DOW closing down 114 points after being up over 90 points in early trading.

After adding roughly 90 points in early trading, the Dow Jones Industrial Average (DJIA – 10,510.95) reversed course around midday, swallowing a loss of 114.9 points, or 1.1%.

In similar fashion, the S&P 500 Index (SPX – 1,120.80) surrendered an early lead to finish 16.1 points, or 1.4%, lower. What’s more, the broad-market barometer broke through support at its 160-day moving average.

Finally, the tech-rich Nasdaq Composite (COMP – 2,317.26) fared the worst of the major market indexes, backpedaling 37 points, or 1.6%, after a brief stint in the black.