Market in Need of a Shakeout

Market in Need of a Shakeout

On Tuesday, both buyers and sellers took a holiday, it seemed, as the indices started unchanged, sagged at noon, and slowly worked their way to almost breakeven by the closing bell. On the negative side, FedEx (NYSE:FDX) fell 3.1% following a cut in its full-year earnings outlook, but offsetting that was a reading of 40 for the NAHB Housing Market Index, which was better than expected.

At Tuesday’s close, the Dow Jones Industrial Average was up 12 points at 13,565, the S&P 500 fell 2 points to 1,459, and the Nasdaq lost a point at 3,178. The NYSE traded 632 million shares and the Nasdaq crossed 388 million. On the Big Board, decliners led advancers by 1.25-to-1, and on the Nasdaq, decliners were fractionally ahead of advancers.

Dow Chart
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Trade of the Day Chart Key

Last week’s breakout due to easing in Europe and the Fed’s new QE Infinity brought in institutional buyers that popped the Dow Jones Industrial Average to new highs. But the breakout also took our internal indicators (MACD, stochastic, and especially relative strength) to extremely overbought numbers.

In the chart above, we see the stochastic arching down and flashing a near-term sell signal. The other cause for concern is the distance between the current price and the 50-day moving average — whenever it gets to be more than 3%, look for a minor correction.

DJT Chart
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Just as it looked like the Dow Jones Transportation Average would defy gravity and break out, it reverted to its old behavior. Tuesday’s selling of the transports was heavy — down 57 points — which puts it below the 20-day, 50-day and 200-day moving averages and smack into the middle of the seven-month trading range.

Conclusion: Following last week’s major breakout, the market is faced with overbought internal indicators. And at the end of this week, it will have to survive a quadruple-witching day.

The Stock Trader’s Almanac, as pointed out by Sy Harding of, says, “September has opened strongly in 12 of the last 16 years but closed weak.” And he further observed, “September Triple-Witching Expirations week can be dangerous, and the week after is pitiful.”

As noted, price versus the 50-day moving average of the Dow (S&P 500 too) is overbought. And our internal indicators are overbought as well. Look for a pullback to at least the breakout points of each index plus slightly more. The market needs a shakeout prior to resuming its bullish way.

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.

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