by Anthony Mirhaydari | May 21, 2014 12:36 pm
Don’t look now, but the Dow Jones Industrial Average is suffering a technical breakdown.
On Tuesday, the index crashed unceremoniously through its 50-day moving average — a level that has held it up for two months after not one, not two, not three but four separate tests.
The bulls have their buy orders locked in at this level. Can the bears overrun them?
Yes, the Dow is rebounding some today. But given all the other evidence, including technical (weak volume and breadth), sentiment (options prices on the “fear gauge” is at the lowest level in at least eight years), and fundamentals (economic data has been weak both here at home and overseas), I think they will.
And if so, these three dogs of the Dow are headed for trouble.
Click to Enlarge Like the Dow Jones, chipmaker Intel (INTC) has fallen to rest on its 50-day moving average — a level that it hasn’t breached in a meaningful way since January’s market selloff driven by fears over emerging markets.
INTC has been struggling since early April, which is when the overall semiconductor sector started to underperform the broad market to an extent not seen since the October-January period.
With the percentage price oscillator indicator about to drop into negative territory, I’m looking for a downside break of the 50-day MA with a price target on the 200-day moving average near $24 — which would be worth a near 8% drop from current levels.
I recommended the May $27 INTC puts to my Edge Pro clients earlier this month, which ended with a near 30% gain.
Click to Enlarge After ripping higher between February and April to test its early December high, Walmart (WMT) is coming under pressure after reporting weaker-than-expected earnings last week.
Earnings per share came in at $1.10 vs. the $1.15 that was expected while revenue missed at $115 billion vs. $115.9 billion expected. But the kicker was a drop in U.S. same-store sales, suggesting that the consumer is under pressure.
A drop to test two-year support near $72 looks likely, which will be worth about a 5% decline from here.
Click to Enlarge As the most heavily weighted component of the price-weighted Dow, International Business Machines (IBM) has an outsized influence on the direction of the overall index.
After peaking in early April, IBM has been a drag, dropping more than 6% from its high after reporting weaker-than-expected first quarter revenues on a double-digit decline in its emerging markets business.
I’m looking for a drop back to support near the triple-bottom low near $170 set in October, December and February. That’ll be worth an 8%-plus decline from here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
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