The International Monetary Fund (IMF) spoke Tuesday and investors sold. Stocks declined on a broad front led by the technology sector as companies lowered their expectations for Q3 results.
But just after the close, Alcoa (NYSE:AA), traditionally the first to kick off the earnings season, report an unexpected gain in both earnings and revenues. Yum Brands (NYSE:YUM) followed with a profit increase of 23%, which also beat analysts’ estimates.
At Tuesday’s close, the Dow Jones Industrial Average was off 110 points at 13,474, the S&P 500 fell 14 points to 1,441, and the Nasdaq plunged 47 points to 3,065. The NYSE traded 612 million shares and the Nasdaq crossed 364 million. Decliners exceeded advancers on the Big Board and Nasdaq by about 3.4-to-1.
The Nasdaq broke its near-term support line at 3,040 and its 50-day moving average. The three kings of technology — Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) –all turned lower on profit-taking.
The stochastic and MACD both indicate that the selling is likely to continue until the major support at the junction of 3,000 and the intermediate trendline is reached. And all three tech giants are recommended as trading short sales. (See my recent comments on Apple.)
Unlike the Nasdaq, which has every reason to work off an overbought status, the S&P 500 is holding its recent gains. But near term (3-10 days) we will likely see a test of the support line at 1,430 and perhaps even the breakout line at 1,418-1,419.
Highly respected technician Michael Ashbaugh, using 20-day Bollinger Bands with two standard deviations, noted, “At the risk of getting too technical, the September breakout was twice punctuated by two consecutive closes above the 20-day bands.” He went on to say that this is an unusually strong bullish indicator of further gains.
Conclusion: Fear of Q3 earnings failures, coupled with unrest in Greece and negative Asian and European headlines, has caused a pause in the uptrend. So far, the brunt of the selling is being absorbed by the Nasdaq and a handful of overbought stocks. This is perfectly normal activity following a major breakout like we had in September.
The 3% pullback from the September high down to 1,430 might be extended to a more common 5% correction and could last for up to 10 days before reversing. Use this time to either sell short some of the techs, if you are a trader, or prepare your list of stocks that you want to buy on a pullback. The bull is not dead, just resting.
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.