S&P Reversal in the Cards, but Which Way Will It Go?

by Sam Collins | December 12, 2013 2:27 am

Stocks suffered a broad round of selling Wednesday as investors considered the increased possibility of a cutback in the Federal Reserve’s bond buying program due to Congress’ budget deal.

The major indices had their biggest loss in a month. It was the first 1%-plus loss for the S&P 500 since April. And 25 of the 30 Dow stocks were lower with the index falling 0.81%, while the Nasdaq was smacked with a loss of 1.4%.

But even on a day when most stocks suffered losses, a few racked up gains. MasterCard (MA[1]) was up 3.53% after saying it would raise its quarterly dividend by 83% and announcing a new $3.5 billion buyback and 10-for-1 stock split. And Home Depot (HD[2]) rose 0.5% after raising profit projections for 2015.

At Wednesday’s close, the Dow Jones Industrial Average fell 130 points to 15,844, the S&P 500 plummeted 20 points to 1,782, and the Nasdaq dropped 57 points to 4,004. The primary market of the NYSE traded 741 million shares with total volume of 3.5 billion shares, and the Nasdaq traded total volume of 1.9 billion shares. On the Big Board, decliners were ahead of advancers by 4-to-1, and on the Nasdaq, decliners were ahead by 3.3-to-1.

12 12 13 spx 300x193 S&P Reversal in the Cards, but Which Way Will It Go?
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chart key 300x84 S&P Reversal in the Cards, but Which Way Will It Go?[3]

We’ve seen this S&P 500 chart many times, but now that MACD is in bearish territory, it is important that the support line at 1,775 holds. A close below there would most likely lead to a test of the 50-day moving average at 1,758.

It may also cause some to claim that a head-and-shoulders break from a neckline at 1,775 has occurred. But this pattern is not that of a traditional head-and-shoulders formation. The right shoulder should not be higher than left. And volume should be picking up at a rate of 2-to-1, but instead is average.

12 12 13 spx bb 300x195 S&P Reversal in the Cards, but Which Way Will It Go?
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This is the first time that I’ve shown this illustration because of its relevance to our internal indicator, the Collins-Bollinger Reversal (CBR). To trigger an upside reversal, what I’d like to see is shown by the red arrows, i.e., a penetration of the lower band (now at 1,781) and a close higher. Higher volume should also accompany the reversal. 

Conclusion: The current round of selling appears to be profit-taking accompanied by some mild emotional liquidations. However, a close below the support line at 1,775 could be the signal for an intermediate reversal and a drop to the 50-day moving average or lower. Even if that occurs, the extent of the selling is likely to be brief since so many investors, including some heavy-hitting money managers, have been waiting for a buying opportunity. 

Upside reversals from the lower Bollinger Band usually provide a positive signal. These reversals most often result from a sharp intraday fall followed by a late rally and a close on an advance for that day. 

We are in a powerful bull market, but patience and savvy must be exercised if you are to snap up bargains that will pay off when the next wave of buying appears.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

Endnotes:
  1. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  2. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  3. [Image]: http://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  4. click here: http://www.bloomberg.com/apps/ecal?c=US
  5. click here: http://www.bloomberg.com/markets/economic-calendar/

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