Nasdaq’s Death Cross Followed By… a Buy Signal?

by Sam Collins | December 20, 2012 2:45 am

Nasdaq’s Death Cross Followed By… a Buy Signal?

Stocks opened higher Wednesday, reflecting Tuesday’s optimism. They then traded flat until noon when President Obama appeared to reject the Republicans’ plan B. House Speaker John Boehner replied in a terse announcement that the House of Representatives would pass a bill today that would throw the ball back to the president. It was clear that the parties were as far apart as ever. The market sagged and then sold off sharply in the final half hour.

At the close, the Dow Jones Industrial Average was off 99 points to 13,252, the S&P 500 fell 11 points to 1,436, and the Nasdaq lost 10 points at 3,044. The NYSE traded 748 million shares and the Nasdaq crossed 423 million. Advancers and decliners were almost even on both exchanges.

12 20 12 nyse 300x216 Nasdaq's Death Cross Followed By… a Buy Signal?
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chart key 300x84 Nasdaq's Death Cross Followed By… a Buy Signal?

Despite the last half-hour sell-off in the Dow and S&P 500, the NYSE Composite held above its resistance line and old closing high of 8,459. The break was made on Tuesday with a close at 8,500 on a strong technical signal — the breakaway gap. The MACD is overbought but still positive, indicating that prices will likely continue to rise.

12 20 12 nasdaq death cross 300x215 Nasdaq's Death Cross Followed By… a Buy Signal?
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Despite its recent breakout, the Nasdaq’s 50-day moving average crossed through its 200-day moving average, executing a death cross. The cross occurred despite Tuesday’s break to a new short-term high and the minor pullback Wednesday. MACD is slightly overbought but still positive.

12 20 12 nasdaq 300x217 Nasdaq's Death Cross Followed By… a Buy Signal?
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Here we clearly see the Nasdaq’s break above the resistance line at 3,040. Note that despite the death cross, the 20-day moving average (green line) is racing higher, and slices through both the 50-day and 200-day moving averages, triggering a short-term buy signal.

Conclusion: Fear has dominated the news headlines as politicians struggle to reach an agreement prior to the Dec. 31 deadline. Despite the anxiety created by the fiscal cliff, the broad-based NYSE Composite broke to new highs on Tuesday and held above its breakout point — the closing high of 8,459 made in early September.

And, despite a death cross on the Nasdaq, the index has held above its resistance line at 3,040 and even executed a short-term buy signal when the 20-day moving average advanced through the 50-day and 200-day moving averages.

“Good tape action” is a term used when stocks react positively to bad news and uncertainty. With the overhanging uncertainty created by Washington, we will stick with a bullish outlook since the tape action is excellent.

Reader response: One reader noted that prices often reverse following the penetration of a Bollinger Band. Our internal indicator, the Collins-Bollinger Reversal (CBR), is constructed to flash a warning when meaningful reversals occur following the penetration of Bollinger Bands.

But Wednesday’s late sell-off of the Dow and S&P 500 failed to trigger sell signals from the CBR. Major moves higher are often preceded by Band penetrations following a pullback of several days before breaking to new highs.

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].

Endnotes:
  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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