Red-hot chipmaker AMD pops on surprise Q2 profit >>> READ MORE

Stick to Buying on Weakness Unless This Happens

If the S&P 500 and Nasdaq don't experience a breakdown, don't jump the gun


Blue-chip stocks held firm Monday, while the Nasdaq was pummeled with a loss of 1.2% and the S&P 500 fell 0.5%. The problem sector was the biotechs, which after a big six-month run, have become the subject of Congressional scrutiny.

Gilead Sciences (GILD) received complaints alleging overpricing of its hepatitis C drug. It bounced back slightly Monday after being hit hard on Friday. But the group, as illustrated by the iShares Nasdaq Biotechnology (IBB), declined 2.8%. The ETF has fallen 9.5% so far March, but it gained more than 65% in 2013.

Technology was down in the morning but rallied in the afternoon. The rebound was led by some of its blue chips, namely Apple (AAPL), IBM (IBM) and Microsoft (MSFT).

At the close, the Dow Jones Industrial Average fell 26 points to 16,277, the S&P 500 dropped 9 points to 1,857, and the Nasdaq was hit with a 50-point loss at 4,226. The NYSE traded total volume of 3.4 billion shares, and the Nasdaq crossed 2.4 billion. Decliners outpaced advancers by 1.7-to-1 on the Big Board and 2.8-to-1 on the Nasdaq.

Nasdaq Chart
Click to Enlarge

Chart Key

The Nasdaq violated its support line at 4,243 and even penetrated its 50-day moving average at 4,221. Its intraday low was 4,191, but it closed about 5 points above it 50-day moving average. The penetration of 4,243 looks much like a break of a head-and-shoulders formation, but it is not perfect. However, assuming the worst, the target for Monday’s break is 4,114 if the break is confirmed by a close below the 50-day moving average at 4,221.

SPX Chart
Click to Enlarge

The S&P 500 has failed to penetrate its high and pulled back to the support line at 1,850. A break of the zone at 1,813 to 1,850 would also result in piercing the 50-day moving average, now at 1,833.

Conclusion: Monday’s weakness, led by the small- and mid-cap stocks, could be the beginning of a correction. However, jumping the gun is never a good idea since reversals back up are common in bull markets. So far Monday’s negative action, which was generally confined to the biotech sector, has not rolled into a general market decline. It was not accompanied by a burst in selling or a general sell-off of other stable industry groups. Unless the S&P 500 and Nasdaq experience a breakdown of their support zones, we will stick with the plan of buying on weakness.

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,

©2017 InvestorPlace Media, LLC