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Market Ripe for More Short-term Profit-Taking

Dow Theory non-confirmation could lead to some selling


On Friday, volume surged as a result of quadruple witching, but after the opening stocks traded flat and ended the day with mild selling. The Dow Jones Industrial Average closed the week with a loss, its first in three weeks, as blue chips experienced heavy selling in the last minutes of trading.

At Friday’s close, the Dow was off 17 points at 13,579, the S&P 500 fell fractionally to 1,460, and the Nasdaq rose 4 points to 3,180. The NYSE traded 1.8 billion shares and the Nasdaq crossed 924 million. Advancers were ahead of decliners on both exchanges by about 1.5-to-1. For the week, the Dow was off 0.1%, the S&P 500 fell 0.4%, and the Nasdaq was down 0.1%.

DJI Chart
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Trade of the Day Chart Key

On Thursday, Sept. 13, the Dow industrials and other major indices broke from a six-month trading pattern. The break was no doubt in large part due to the Fed’s announcement of QE Infinity, which promised the Fed’s support “even into a recovery.”

By Friday, the advance from the breakout had taken the Dow to an extremely overbought level. Thus, some profit-taking was due, and the Dow closed modestly lower accompanied by huge volume on a quadruple witching day.

The MACD indicator is still very overbought, and so a further retracement is probably due with support at the breakout line at 13,275.

DJT Chart
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We’ve covered the “non-confirmation” of the Dow Jones Transportation Average at some length in the past. But The Wall Street Journal put unusual emphasis on it this weekend. One reason for their concern is that, on Friday, the Dow transports closed slightly below the support line of a six-month trading pattern. This puts the Dow Theory’s “non-confirmation” concept to a test, since it appears that one index has broken out and the other broken down.

There is little time for the transports to reverse course, especially with an MACD sell signal accompanying the breakdown.

SPX Chart
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The S&P 500 appears due for more profit-taking, but any pullback in this index is likely to be short-lived. The first support is at the four tops at 1,438, and then the major breakout line at 1,418. There are also multiple layers of support beginning with the 50-day moving average at 1,404.

The index also looks due for some profit taking because its relative strength reading, at 74.74, almost touched the high reading of the year at 75.38 in March.

Conclusion: The breakout has been sustained, confirming that the bull market is intact. Long-term and intermediate trends are solidly bullish. But near-term there is that pesky “non-confirmation” from the Dow’s charts that could lead to some near-term profit-taking.

If so, take advantage of a pullback to add to positions or grab those high-quality stocks that seemed to get away from you. The strongest sectors are technology, precious metals (including gold mining), homebuilders, REITs, telecom, materials and financials.

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.

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