2 Major Indices Execute a Bearish Key Reversal Day

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On Monday, stocks retraced an early morning break to new highs by the Nasdaq Composite, which broke a five-session winning streak.

The pullback was associated with profit-taking in biotech. The sector took a nasty hit with the NASDAQ Biotechnology Index falling 4.1% and the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) off 4.2%. It was the second consecutive session that the aggressive sector took a loss. Of the 10 sectors of the S&P 500, Health Care SPDR (ETF) (NYSEARCA:XLV) registered the biggest loss, down 1.8%.

Biogen Inc (NASDAQ:BIIB) fell 3.1% on Monday and 6.6% on Friday. Mylan NV (NASDAQ:MYL) rejected an offer from Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). MYL dropped 5.7% and TEVA fell 4.3%.

FactSet reported that Q1 earnings are on track to decline 2.8% from a year ago. If this projection proves accurate, it will be the first quarter since Q3 2012 that earnings had a year-over-year decline.

Precious metals had a strong day. Gold rose 2.4% and silver gained 4.9%. But WTI crude oil fell 0.3%, closing at $56.99 a barrel.

At Monday’s close, the Dow Jones Industrial Average was down 42 points at 18,038, the S&P 500 fell 9 points to 2,109, the Nasdaq lost 32 points at 5,060, and the Russell 2000 was off 15 points at 1,253.

The NYSE’s primary market traded 800 million shares with total volume of 3.4 billion. The Nasdaq crossed 2.1 billion shares. On the Big Board, decliners outpaced advancers by 1.7-to-1, and on the Nasdaq, decliners led by 2.4-to-1.

Nasdaq Chart
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Chart Key

The failure of the Nasdaq to hold its intraday high and close below the prior day’s low triggers a key reversal day (KRD). We’ve seen several KRDs in the past six years, and most have not materialized into a serious correction. Yet, as pointed out on Monday, the angle of advance for small- and mid-cap stocks is so steep that it is likely unsustainable.

I don’t expect a major correction, but some sectors — like biotech — have become overextended and are subject to profit-taking.

S&P 500 Chart
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The chart of the S&P 500 does not show a steep advance, but it did execute a short-term sell signal from my proprietary indicator, the Collins-Bollinger Reversal (CBR).

It also performed a KRD, but that was because of the influence of a dramatic two-day round of profit-taking in the biotechnology sector. However, like the Nasdaq, its MACD indicator failed to confirm Monday’s new high — a negative technical event.

Conclusion

Small- and mid-cap stocks continue to lose momentum with the Nasdaq performing a bearish key reversal off a new intraday high. It will surprise some technicians that the S&P 500 also executed a reversal. But, as explained above, the reversal of the S&P 500 is not as serious as the failure of the small and mid caps.

As a result of Tuesday’s negative technical performance, expect a round of profit-taking that could result in a pullback to the 50-day moving average of the Nasdaq at 4,955 and the S&P 500 at 2,090.

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/2015/04/daily-market-outlook-nasdaq-sp-500-execute-key-reversal-day/.

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