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Don’t Get Caught on the Wrong Side of the Market

Traders would be wise to close their short positions immediately


On Tuesday, stocks fell for the fifth straight day as European sovereign debt problems and fear of lower earnings for U.S. companies dominated trading. Industrials, materials and energy stocks were down the most. But banks were not far behind.

However, after the close Alcoa (NYSE:AA), the first of the Dow 30 stocks to report earnings, beat analysts’ estimates by reporting a 10-cent-per-share profit versus an estimated loss of 4 cents. This should relieve some of the downside pressure today.

At the close, the Dow Jones Industrial Average was down 214 points to 12,714, the S&P 500 fell 24 points to 1,359, and the Nasdaq lost 56 points to 2,991. Volume increased slightly to 970 million shares on the NYSE and 532 on the Nasdaq. Decliners outnumbered advancers on the NYSE by over 6-to-1 and by 4.6-to-1 on the Nasdaq.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

When, on Monday, the S&P 500 broke 1,371, as well as its 50-day moving average (blue line), selling accelerated to the next major level of support at 1,347 to 1,357. These numbers represent the tops of July. This line has great technical significance and probably will hold since it represents those two major tops and intersects with the intermediate trendline. Thus, the probability is high that after five straight days down, coupled with an earnings surprise from Alcoa, we will rally today. 

It is fair, however, to warn our readers that some technicians disagree and place far more emphasis on the break at 1,371. Their reasoning is based on a peak that occurred over a decade ago, and my experience leads me to discount data over five years old despite my respect for their opinion. 

As a technician and money manager for 45 years, I remember that data very well, but also believe that stockholders of that era have long ago disposed of their holdings, negating the significance of that level.

Conclusion: The stock market reversed in October and ran for more than a 30% gain from its low. And in January, the S&P 500 ran in a straight line with hardly a hesitation to new highs. 

A five-day consolidation should not shake our view that the bull market is just hesitating. Traders should immediately cut loose their shorts. A 40-point bounce back to 1,400 is likely.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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