Volume Fits the Pattern of a Major Bottom

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Friday ended another shaky week for stocks. The technology sector took a pounding resulting in the Nasdaq’s lowest close since October 2014.

Job growth of 151,000 in January was lower than expected, but unemployment fell slightly to 4.9%. The mixed picture of the U.S. labor market added to fear of another rate hike by the Federal Reserve in March, which drove stock prices down.

LinkedIn Corp (LNKD) plummeted 43.6% and Tableau Software Inc (DATA) lost 49.4% as both companies lowered guidance for the full year.

The yield on the 10-year Treasury note fell to a 10-month low of 1.86%, down from 1.87% on Thursday. The U.S. dollar rose against a basket of currencies but was down 1.9% for the week. The euro fell 0.5% on Friday to 1.1158.

Oil declined 2.6% to $30.89 a barrel and gold rose 1.4% to $1,174.10 an ounce.

At Friday’s close, the Dow Jones Industrial Average was down 212 points to 16,205, the S&P 500 fell 35 points to 1,880, the Nasdaq lost 146 points at 4,363 and the Russell 2000 was down 29 points at 986.

The NYSE Composite’s primary exchange traded 1.2 billion shares with total volume of 4.9 billion. The Nasdaq crossed 2.5 billion shares. On the Big Board, decliners outpaced advancers by 3.2-to-1, and on the Nasdaq, decliners led by 4.3- to-1. Block trades on the Big Board declined to 5,720 from 6,276 on Thursday.

For the week, the Dow fell 1.6% (-6.9% year to date), the S&P 500 was off 3% (-7.9% YTD), the Nasdaq lost 5.4% (-12.9% YTD) and the Russell 2000 declined 4.8% (-13.2% YTD).

MDY Chart
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IWM Chart
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Chart Key

Note the huge selling from Jan. 4 to the bottom on Jan. 20 on both the SPDR S&P MidCap 400 ETF (MDY) and iShares Russell 2000 Index (ETF) (IWM). There was also a buy signal from my proprietary indicator, the Collins-Bollinger Reversal (CBR) on Jan. 20.

Despite Friday’s emotional sell-off, volume on both charts was less than the preceding volume on the buy side, and considerably less than the selling from Jan. 4 -20.

Conclusion

Edwards and Magee’s The Technical Analysis of Stock Trends is the basis for most modern chart analysis despite its initial publication 68 years ago. They, along with other famous and successful technicians, place maximum emphasis on volume, especially huge volume at tops and bottoms.

Jeff Saut, chief investment strategist at Raymond James, has been predicting a bottom for weeks. Certainly the cluster of very high-volume selling followed by higher-than-average buying volume fits the pattern of a major bottom.

However, until the market makes a successful attack on MDY’s resistance line at $245 and IWM’s 50-day moving average at $109, and the Dow’s closing low at 15,666 (now at 16,205) holds, I will be selling into rallies and buying pullbacks. The current trend is sideways, but there is enough volatility to provide traders with opportunities as both buyers and sellers in leveraged positions.

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/2016/02/daily-market-outlook-volume-fits-pattern-major-bottom/.

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