Wait for a Correction Before You Make Buy Decisions

by Sam Collins | January 7, 2014 8:18 am

Stocks fell for the second straight session as profit-taking, a carryover from last year, coupled with a weak report from the services sector, kept investors on the sidelines. It is the first time since 2005 that the S&P 500 started a year with three consecutive losses.

The ISM’s nonmanufacturing purchasing managers index (PMI) for December fell to 53 from 53.9 in November, while forecasts had been for an increase to 54.5. But a positive factory orders report showing an increase of 1.8% in November versus an expected increase of 1.5% partially offset the impact of the PMI.

Gold ended slightly lower and U.S. Treasury bonds gained following the poor results of the ISM report. The 10-year Treasury’s yield fell to 2.96% from over 3% on Friday.

Earnings season will start on Thursday with the first report coming from Alcoa (AA[1]).

At Monday’s close, the Dow Jones Industrial Average fell 45 points to 16,425, the S&P 500 lost 5 points at 1,827, and the Nasdaq fell 18 points to 4,114. Due to the adverse weather conditions on the East Coast, volume was down to just 667 million shares traded on the primary market of the NYSE. Total volume was 3.2 billion shares on the NYSE and 2.3 billion on the Nasdaq. On the Big Board, there were more decliners than advancers by a ratio of 1.2-to-1, and on the Nasdaq, there were more decliners by 1.7-to-1.

01 07 14 spx 300x192 Wait for a Correction Before You Make Buy Decisions
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chart key 300x84 Wait for a Correction Before You Make Buy Decisions [2]

The November high at 1,813 and the line at 1,775 form the first zone of support for the S&P 500. And just above is the 20-day moving average, now at 1,814, which could thwart an attack on that zone. And within the zone is the 50-day moving average at 1,794. Thus, despite the pending sell signal from MACD, there are numerous support lines established over eight months that could hold back further liquidations.

01 07 14 nasd 300x191 Wait for a Correction Before You Make Buy Decisions
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The Nasdaq’s angle of advance is steeper than the S&P 500′s, but like the S&P 500, its chart has in-depth support. First is the 20-day moving average at 4,091, then the support zone at 3,980 to 4,075, and the 50-day moving average at 4,015. And most critical to maintaining the trend is the intermediate support line at 3,950. However, MACD is flashing a sell signal.

Conclusion: The near-term overbought nature of the stock market resulted from December’s unusually strong rally. Thus, three consecutive days of mild selling has not seriously threatened the overall trend of the market. The bull is still firmly in control.

However, as noted in yesterday’s Daily Market Outlook[3], the market probably cannot, in the long run, sustain the current sharp angle of advance. The market is due for a mild correction, thus traders and investors alike should hesitate before making new major commitments. Instead they should use the overall support zones, moving averages and trendlines clearly drawn in our index charts to guide them to specific buy points on individual stocks.

I am convinced that 2014 will end with every index higher than Monday’s close. However, the path to new highs will likely be more challenging with several corrections and many false starts. Success will come to those who are able to control their emotions by adhering to a solid purchase and stop-loss plan developed around the proven principles of technical analysis.

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. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/12/chart-key.gif
  3. yesterday’s Daily Market Outlook: http://investorplace.com/2014/01/daily-stock-market-news-bulls-charge-unless-lines-broken/
  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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