Falling Out of Bear Flag Would Spell Trouble

by Serge Berger | April 23, 2012 5:22 pm

Yesterday’s 1% gap-down open on the S&P 500 more or less framed the excitement for the day as stocks found their daily low early in the day and rallied modestly from there. On the S&P 500 that low coincided with the 1,358-ish low from April 10 if we look at the 60-minute chart.

Nevertheless, I am sticking with my call that if we fall out of the bear flag (white lines) as we did today, we will eventually see 1,340 and likely the 1,320 area in the not-too-distant future. Remember that the S&P 500 is still up 8.7% on the year and at its peak was up around 12% for the year.

SPX Chart
Click to Enlarge

If we compare that to Europe, then the S&P 500 has hardly begun to correct. The German DAX at its 2012 year-to-date peak was up 21% but now sits at just half those gains, up 10%. The DAX does look like it wants to smack against the 200-day simple moving average, which is almost 5% lower from yesterday’s close. Again, I understand there are different dynamics at work inEurope, but let’s not underestimate global asset and risk correlations.

DAX Chart
Click to Enlarge

The industrial sector as measured by the Industrial Select Sector SPDR (NYSE:XLI[1]) looks heavy. Caterpillar (NYSE:CAT[2]) is almost 5.4% of the ETF and is scheduled to report earnings on April 25. The industrial sector is also an important broader sector and thus important for overall market direction. A break below $35.50 on the XLI could also lead it to move toward its 200-day simple moving average (blue line).

XLI chart
Click to Enlarge

All in all, yesterday’s fairly lackluster trading once the open massacre happened was not entirely unexpected. It’s a big week ahead with Apple (NASDAQ:AAPL[3]) earnings out today, FOMC meeting and Bernanke speech on Wednesday, as well as a ton of other corporate earnings, not to mention the continued turmoil inEurope.

Pick your spots and always use stops.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

  1. XLI: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLI
  2. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  5. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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