Don’t Chase Stocks at This Level

by Sam Collins | September 5, 2012 2:48 am

The Dow opened lower on Tuesday, and by mid-morning was off more than 110 points following lower-than-expected results from the August ISM index and lower July construction spending. However, many of the early losses were overcome by an afternoon rally.

At the close, the Dow Jones Industrial Average was off 55 points at 13,036, the S&P 500 fell 2 points to 1,405, and the Nasdaq gained 8 points at 3,075. The NYSE traded 638 million shares and the Nasdaq crossed 375 million. Advancers led decliners on both exchanges by about 1.5-to-1.

SPX Weekly Chart
Click to Enlarge

On Tuesday morning, CNBC guest Jeff Weiss, chief technical analyst at Tejas Securities Group, referred to the above chart as an indication that the 1,400 to 1,425 zone is of great significance. The weekly chart of the S&P 500 shows that zone as the final support prior to the 36% decline in late 2008, and it roughly connects with the highs of this year. Weiss pointed out that if the S&P 500 can hold above that line, then the zone will act as significant support.

SPX Monthly Chart
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The second chart is a monthly chart that graphically illustrates the importance of 1,400 to 1,410 as major resistance. So far, the S&P 500 has been unsuccessful in closing above that zone.

SPX Fail Chart
Click to EnlargeTrade of the Day Chart Key

We have been pointing to the significance of the 1,400 to 1,420 zone for months, but what is of concern is the market’s difficulty in breaching these barriers. Our own chart shows the recent pullback, which on Tuesday, sliced through the 20-day moving average (green line) and is accompanied by a strong sell signal from the MACD indicator.

SPX 17-Month Moving Average Chart
Click to Enlarge

Conclusion: With all of the international and domestic crosscurrents that could come to a focus this month, I see no reason to rush into a broad buying program. Our 17-month moving average S&P 500 chart above clearly shows that the bull market is still secure. However, since it is possible to have a 10% to 15% pullback from 1,400, I’d rather wait to see if the decline occurs than chase stocks at current levels. If a breakout occurs, then we will have plenty of time to jump aboard.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[1].

For a list of this week’s economic reports due out, click here[2].

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