A Break Below These Levels Could Trigger a Major Pullback

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Friday’s trading ended four straight negative sessions with a modest gain. However, the Dow and S&P 500 posted their third consecutive weekly loss.

Of the 10 S&P sectors, six showed a gain on Friday. The leaders were health care, up 0.7%, and consumer staples and utilities, both up 0.6%. All three sectors are considered to be defensive in nature. Biotech led the subsectors with the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) up 2% but still down 5.2% for the week.

Late in the day, the Nasdaq rallied on news that Intel Corporation (NASDAQ:INTC) is in talks to acquire Altera Corporation (NASDAQ:ALTR). Intel jumped 6.4% and Altera soared 28.4%. If completed, it would be the largest acquisition in Intel’s history. The deal also had a positive impact on the semiconductor group with the iShares PHLX SOX Semiconductor (NASDAQ:SOXX) up 2.8%.

Lower oil prices and a U.S. strong dollar are interpreted as negative for companies that deal in global markets. Thus, the Dow industrials and S&P 500, home to many stocks impacted by this outlook, are finding it difficult to move much higher. And low volume on Friday’s positive close supports the outlook of selling pressure on global companies.

Oil prices were down again on Friday with crude futures falling 5% to $48.87 a barrel. However, the dollar fell versus the euro, which was up 0.1% to $1.09, and the British pound, up 0.2% at $1.49. Gold fell to $1,199.80 an ounce, down 0.5%. The benchmark 10-year Treasury note’s yield fell to 1.95%, down from 2.01% on Thursday.

At Friday’s close, the Dow Jones Industrial Average gained 34 points at 17,713, the S&P 500 rose 5 points to 2,061, the Nasdaq gained 28 points at 4,891, and the Russell 2000 was up 8 points to 1,240.

The NYSE’s primary market traded 741 million shares with total volume of 3 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers outpaced decliners by 1.5-to-1, and on the Nasdaq, advancers led by 1.4-to-1.

For the week, the Dow fell 2.3%, the S&P 500 was off 2.2%, the Nasdaq lost 2.7%, and the Russell 2000 dropped 2.1%.

Dow Jones Transportation Average Chart
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Chart Key

I’ve discussed the importance of the Dow Jones Transportation Average as a predictor of future economic activity. I’ve also discussed its importance as a component of a key technical indicator — Dow Theory.

Dow Theory is one of the oldest and most reliable of all technical strategies. It states that when the Dow industrials or the transports makes a new high and the other index fails to confirm, there is a strong possibility of an approaching change in the major trend.

The Dow industrials hit a new high on March 2, and the Dow Jones Transportation Average has failed to confirm. And now the transports are threatening to break the inflection point at the 200-day moving average at 8,650.

However, since the index is now approaching several other support lines, the twin Collins-Bollinger Reversal (CBR) buy signals at 8,584, and the September high at 8,695, there is still a slight possibility of a rally from this area.

S&P 500 Chart
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Last week, the S&P 500 violated the support line at 2,064, and last week, it closed below its 50-day moving average at 2,069. On Thursday, the S&P 500 threatened to violate the March low at 2,040 but held. The next support resides at its 200-day moving average at 2,010.81, followed by the inflection points at the lows of December (1,973) and February (1,981).

Conclusion

Our readers should review the above charts with consideration that a technically important decline has already occurred. And with other indicators, chiefly the MACD, stochastics and momentum all pointing lower, there is a possibility of an intermediate breakdown similar to October’s decline, which took the Dow industrials to a closing low of 15,855.

However, the signal for a major pullback would be triggered only if the inflection points noted for each index are violated.

It is time for patience since buyers may still emerge to confirm the existing uptrend. So far, we have no evidence of a pending rally, and a close below the levels discussed above would be a clear signal to move to the sidelines.

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/2015/03/daily-market-outlook-a-break-below-these-levels-could-trigger-a-major-pullback/.

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