by Sam Collins | August 22, 2012 2:00 am
The Dow Jones Industrial Average fell yesterday for its biggest decline in three weeks, and intraday traded the biggest spread since Aug. 3. This was the second day of losses for the Dow. The S&P 500 suffered a similar fate but frustrated investors by touching a new four-year high, reversing and closing lower.
There appeared to be no news that directly caused the decline, yet the selling was accompanied by a slight pickup in volume. European and Asian markets were mostly higher, but crude oil futures rose for the fifth time in six sessions and $100/barrel oil has been predicted by most in that industry. But technology leader Apple (NASDAQ:AAPL) fell following Oracle Investment Research’s reduction in its investment rating, and this could have accounted for some of the selling in tech stocks.
At the close, the DJIA was off 68 points at 13,204, the S&P 500 fell five points to 1,313, and Nasdaq lost nine points, falling to 3,067. The NYSE traded 639 million shares and the Nasdaq crossed 395 million. On the Big Board, decliners were ahead of advancers by 1.25-to-1; on the Nasdaq, decliners were ahead by 1.3-to-1.
The Dow Jones Industrial Average fell yesterday following a new high for the year and closed lower than at any time in the past three days. But what is important from the view of technical analysis is that the DJIA opened higher than the prior day’s close and closed lower than the prior day’s low. This rare phenomenon is called a “key reversal day.” This signals a reversal of the current trend, and is telling us that the near-term trend has changed from up to down. Accompanying this signal was a sell from the MACD — another reliable indicator that the short-term trend is changing.
The S&P 500 reversed as well, but its reversal was not as unusual as the Dow’s in that it failed to close lower than the prior day’s low. But it is a signal of a near-term change in trend and is close to being supported by its MACD, which is a fraction from issuing a sell signal.
Conclusion: Yesterday’s price action is a major negative for the bulls in that it confirms that the possible triple top covered in recent DTAs has been confirmed by a key reversal day in the Dow and a reversal day in the S&P 500. The reliability of the key reversal day is accepted by most traditional technicians as a “kiss of death,” since it normally precedes an overall change in trend. And the S&P 500’s reversal day — accompanied by a menacing-looking MACD — also alerts us that a significant change is about to occur. Thus, in a single day, significant sell signals occurred on the two of the market’s most-watched indices.
All pending purchases should be cancelled, and traders and intermediate-term investors should immediately nail down profits and sell stocks that have not performed well in the past six weeks. Longer-term investors should review portfolios for non-performers as well and dump them, too. Traders and investors alike should revert to defensive strategies, which we will cover in subsequent DTAs.
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.
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