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Will Dow’s Support Line Hold?

High-volume penetration could quickly change overall technical picture


Despite a positive opening on Friday morning, stocks couldn’t hold their gains and closed mixed. A strong October consumer sentiment number, which was the best since September 2007, failed to attract buyers. Instead the focus appeared to be on fear of declining earnings from U.S. banks and Spain’s delay in asking for a bailout.

Nevertheless the Dow Jones Industrial Average did break a four-day losing streak, closing up 2 points at 13,329. The S&P 500 fell 4 points to 1,429, and the Nasdaq lost 5 points at 3,044. The NYSE traded 623 million shares and the Nasdaq crossed 369 million. Decliners outpaced advancers by 1.7-to-1 on the Big Board and by 2-to-1 on the Nasdaq. For the week, the Dow fell 2.1%, the S&P 500 was off 2.2%, and the Nasdaq fell 2.9%.

SPX Chart

Trade of the Day Chart Key

On Friday, the S&P 500 closed exactly on the first meaningful support line, which is the 50-day moving average. However, the major support at 1,418, which was the early September breakout line, is more significant. The MACD is now oversold, and that’s a positive since the line at 1,418 is important enough that, if penetrated on high volume, it could cause an intermediate-term change in trend.

Nasdaq Chart
Click to Enlarge

The Nasdaq has broken initial support at the neckline of a head-and-shoulders intermediate top. The target for the breakdown is 3,000, but support begins at 3,040. Resistance to rallies rests at the 50-day moving average at 3,090 and the neckline at 3,100. The Nasdaq is strongly impacted by the recent declines in Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC).

VIX Chart
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Despite the near-term uncertainty, the CBOE Volatility Index (VIX), often called the “fear gauge,” is not showing much public trepidation. It is pushing toward the upper range of the past three months but is still well below its 200-day moving average at 18, with a reading of 16.14. This indicates that expected volatility over the next 30 days is relatively low, giving a boost to the bulls.

Conclusion: As noted on Friday, the Dow Jones Industrial Average and Dow Jones Transportation Average are in fairly good technical shape with the industrials declining just 2.5% from their high while they continue to maintain strong near-term support.

A normal correction following new highs usually settles within the 2% to 5% range, thus a full correction would drop the industrials to around 12,900. But both the S&P 500 and the Dow are oversold, and both have held above their immediate support lines.

Volume has been tepid, and normal group rotation, along with acceptable market breadth indicate that the current support line will likely hold. However, a high-volume penetration of the support zones resulting from political upheavals from any number of trouble spots around the world could quickly change the overall technical picture.

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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