Dow’s Intraday Reversal Is Impressive, But…

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Stocks fell on Monday’s opening as concerns about protests in Hong Kong added another brick to the “wall of worry” over the global economy. However, much of the early losses were recovered by the closing bell.

Volatility, as measured by the VIX, has risen almost 40% since its low on Sept.19, driven mostly by those global concerns. Monday marked the sixth consecutive session in which the Dow industrials saw triple-digit intraday action, the longest string in over a year.

Consumer spending rose 0.5% in August from July, and personal income rose 0.3%. Both reports were in line with analysts’ expectations.

Despite the broad decline, many technology stocks ended in the black. Intel (INTC) led the pack, up 1.9%. The company announced a partnership with Mitsubishi Electric to create next-generation factory automation systems.

At Monday’s close, the Dow Jones Industrial Average was off 42 points at 17,071, the S&P 500 fell 5 points to 1,978, the Nasdaq was off 6 points at 4,506, and the Russell 2000 fell a point to 1,118.

The NYSE traded total volume of 3.1 billion shares, and the Nasdaq crossed 1.7 billion shares. Decliners outpaced advancers on both major exchanges by about 1.35-to-1.

VIX ChartClick to Enlarge

The last big jump in the VIX occurred in late July/early August when the Dow bottomed at its 200-day moving average. Clearly there were some put buyers left holding an unprofitable bag after that volatile run.

Regular readers are already aware of my opinion concerning the inconsistency of the VIX as a forecasting tool. Although much was made on TV of the big percentage increase, I still doubt its predictive value.

Dow Chart
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Chart Key

The Dow’s near-term picture has been stronger than the other indices for weeks. Monday’s reversal, after penetrating its 50-day moving average at 16,557 and recovering 137 points from the low of the day, was impressive. The 50-day moving average on this index is a “well-defined inflection point,” according to MarketWatch’s Michael Ashbaugh.

Conclusion

Despite the impressive nature of Monday’s Dow’s performance, there are still technical threats that can’t be eliminated in one day.

First, low volume on recoveries compared with high volume on declines (e.g., 11-to-1 down volume versus up volume on the NYSE on Thursday’s sell-off) is a sign of serious technical weakness. Friday’s low-volume rally appears to be no more than a dead-cat bounce.

Second, the Dow does not normally lead genuine near- and intermediate-term advances. Despite the long-term Dow Theory buy signal on Sept. 17, we would like to see the same type of technical strength from the Nasdaq and Russell 2000.

On Monday, the Nasdaq barely closed above its 50-day moving average, and the Russell 2000 is laboring under a death cross.

Investors may buy the dips; however, traders should be attuned to the short side of the market.

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, https://investorplace.com/2014/09/dows-intraday-reversal-impressive/.

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