Take Profits Now and Accumulate Cash

by Sam Collins | August 2, 2012 2:09 am

Some described Wednesday’s trading as “mixed,” but a more apt description would be “mixed up.” The day started with a computer glitch that had an impact on the first 45 minutes of trading in 148 stocks, some of which appeared to trade at 20 times their normal volume and rose as much as 4.8% in minutes. The NYSE electronic safeguards kicked in preventing a “flash crash” similar to that of 2010, but many stocks halted trading until the problem was cleared, and the exchange said that some trade adjustments would be made.

The Fed’s much-expected announcement to continue with its present policy went off as anticipated. But the central bank noted that economic activity had “decelerated somewhat over the first half of this year.” That’s a shift from their assessment in June that the economy had been expanding moderately this year. The Fed’s next meeting is Sept. 12-13, but more easing could take place between meetings. After the Fed’s announcement, stocks fell and the U.S. dollar rose.

At Wednesday’s close, the Dow Jones Industrial Average was off 33 points at 12,976, the S&P 500 fell 4 points to 1,375, and the Nasdaq was down 19 points at 2,920. Volume on the NYSE may be adjusted due to the glitch, but has been reported at just over 1 billion shares, while 488 million shares traded on the Nasdaq. Decliners outpaced advancers on the Big Board by 1.6-to-1, and on the Nasdaq, decliners were ahead by 2.9-to-1.

Nasdaq Chart
Click to Enlarge

Trade of the Day Chart Key




Unlike the other indices, the Nasdaq is still confined to a trading range defined by a five-month triangle. Just as it appeared that the index would break from its bearish resistance line at 2,960, it reversed down from the line and closed near its low of the day at 2,918. The immediate support for the Nasdaq is the 20-day moving average (green line) at 2,917, and the next support is its 50-day moving average (blue line) at 2,880.

SPX Chart

Despite the near-term uncertainty, our long-term S&P 500 chart with a 17-month moving average confirms that we are in a bull market. Thus, any sharp sell-offs should be regarded as a buying opportunity.

Conclusion: We’ve discussed at length the non-confirmations or “divergences” on the charts of the Dow Jones Industrial Average and Dow Jones Transportation Average, which almost always result in a break to the downside.

Reader Mike495 pointed out Wednesday[1] that I noted a similar non-confirmation in April. He is correct. On April 27, at Dow 13,228, I highlighted a similar divergence[2]:

“Low volume, coupled with anemic breadth, and a Dow Theory non-confirmation (Dow Jones Transportation Index down 56 points, Dow Jones Industrial Average up 114 points) indicate that the rally has reached its limit. Traders, both intermediate- and short term, should book their profits.”

That was two days prior to a reversal and fall of over 1,100 points. It would be foolish for me to predict that such a decline will occur now, especially in a market so dominated by foreign headlines. But the conditions for a sharp sell-off are present, and it would be prudent to take profits now and continue to accumulate cash.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. pointed out Wednesday: http://investorplace.com/2012/08/daily-stock-market-news-two-major-divergences-should-put-investors-on-guard/
  2. I highlighted a similar divergence: http://investorplace.com/2012/04/daily-stock-market-news-warning-this-rally-has-reached-its-limit/
  3. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  4. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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