3 Deadly Signals for the Nasdaq

by Sam Collins | December 31, 2012 2:07 am

On Friday, stocks opened lower as expectations diminished for a resolution of the budget dispute. There was a cursory rally at mid-morning in response to rumors that the president would offer an acceptable alternative at an afternoon meeting of lawmakers, but that proved false. In response, the Dow Jones Industrial Average fell almost 90 points in the last hour of trading.

At Friday’s close, the Dow was down 158 points at 12,938, the S&P 500 fell 16 points to 1,402, and the Nasdaq dropped 26 points to 2,960. The NYSE traded 535 million shares and the Nasdaq crossed 270 million. Decliners outpaced advancers by about 2-to-1 on both exchanges.

For the week, the Dow was off 1.9%, the S&P 500 fell 1.9%, and the Nasdaq dropped 2%.

DJI Chart
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Trade of the Day Chart Key

There is lot going on with the Dow chart, so I’ll take each feature in order of importance:

First, the overall long-term and intermediate-term trends are up. Note the long-term bullish resistance line, which starts at the July 2011 high and connects with the May/April and September/October highs of 2012, which is also the intermediate term resistance line. A break above this line, now at over 13,800, would confirm the continuation of the bull market. The long-term bullish support line is not shown but is close to 11,750.

Second, the intermediate-term support line connects with the July 2010 low (not shown) and the June and November 2012 lows and intersects at about 12,600.

Finally, the near-term resistance line is at about 13,350 with its most recent top at 13,366 on Dec. 18. Support at the 50-day and 200-day moving averages was broken last week, as well as the near-term support line. MACD is on a sell signal.

DJT Chart
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The Dow Jones Transportation Average chart is less complicated. The index has been in consolidation since late last year with support at its intermediate support line, now at about 4,850. Recent strength resulted in a break at 5,160 from the right triangle and a run to 5,368, which challenged the March 2012 top at 5,411, but failed to exceed that high. Last week, MACD issued a sell signal.

On a pullback, support is first at the breakout point at 5,160, and then the intersection of the 20-day and 50-day moving averages at 5,120. The third support is at the intermediate support line, now at about 4,850.

Nasdaq Chart
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The Nasdaq’s chart is quite simple. A bearish horn with higher highs and lower lows exists. This is an unusual pattern, but almost always signals a top — in this case of short-term duration. Support exists at 2,950 with resistance at about 3,075. A strong MACD sell signal was triggered last week and a death cross in mid-December.

But the most important feature of this chart is the support at 2,950, because if it fails to hold, then the next support is at the rising major bullish support line (LT) now just below 2,850. A breakdown and failed test of that line would signal a Nasdaq bear market.

Conclusion: Despite the ability of investors to maintain a positive outlook in the face of a deteriorating fiscal crisis, charts of the major indices are taking on patterns often associated with the beginning of downtrends.

Bullish sentiment (a contra-indicator) as measured by the AAII Sentiment Survey registered its second highest level of the year. And bearish sentiment fell for the fourth time in five weeks. Volatility is high and that usually favors traders, but even seasoned traders are having a tough time outguessing hourly moves.

Despite the short-term negatives, the overall bull market is intact. Thus, long-term investors should review their buy list and adjust buy under prices so that they may sweep up bargains in the event of a panic-driven temporary sell-off.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[1].

For a list of this week’s economic reports due out, click here[2].

  1. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  2. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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