Stocks May Have Further to Fall

by Sam Collins | October 1, 2012 2:58 am

On Friday, concerns over Spain’s credit rating and a lower-than-expected reading from the September Chicago PMI led to a lower opening. Stocks clawed their way higher in the morning, but sellers dominated from noon to the close. Defensive stocks led the afternoon trades with utilities and pharmaceuticals showing strength. 

At Friday’s close, the Dow Jones Industrial Average was off 49 points at 13,437, the S&P 500 fell 6 points to 1,441, and the Nasdaq was off 20 points at 3,116. The NYSE traded 831 million shares and the Nasdaq crossed 484 million. Decliners led advancers on the Big Board by 1.5-to-1 and on the Nasdaq by 1.9-to-1. For the week, the Dow fell 1%, the S&P 500 lost 1.3%, and the Nasdaq was down 2%.

 SPX 17-Month Chart
Click to Enlarge

September is historically the weakest month of the year, but this year it will be known as the month that bucked that trend. In the month that ended on Friday, the stock market achieved the following gains: S&P 500 +2.4%; Dow +2.6%; and Nasdaq +1.6%. 

Even on the long-term monthly chart of the S&P 500, we are able to see the big jump from the red line at just above 1,300 that represents the S&P 500’s 2.4% gain. This 17-month simple moving average chart clearly shows that the bull market is intact and even appears to be picking up strength as it approaches the all-time high at 1,576 made in October 2007.

Those who depend upon the 17-month simple moving average chart to guide their long-term buys/sells have, over many years, been rewarded with outstanding gains.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

The S&P 500’s gain was in large part due to the Sept. 13 announcement by the Fed of another round of quantitative easing followed by similar programs in Europe and China. But whatever the reason, the charts tell the story of support and resistance that amid the many cross-currents of economics and politics can guide the decisions of the investor/trader. 

The S&P 500 has been able to hold above the initial correction that almost always follows a major breakout like the pop through 1,418. The first support line at 1,438 was violated early last week, but the index quickly turned north and hopped above the line, closing the month at 1,441. 

If that line fails to hold, the next support is at the important breakout line at 1,418, and then the 50-day moving average at 1,412. The MACD internal indicator is flashing a short-term sell signal, and so it is probable that 1,418 will come under pressure.

DJT Chart
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I have expressed concern about the lack of follow-through of the Dow Jones Transportation Average for over a month. Last week, this index, which has failed to follow its brother, the Dow Jones Industrial Average, to new highs is a serious negative signal to some traders. 

The Dow Theory, long held by many technicians, states that if either index fails to “confirm” the other’s move, this is a negative that could lead to a collapse of the market. So far this year, the Dow industrials are up 10% and the transports are down 2%. 

On Friday, the transports fell again — this time by 49 points. Support is at the June 4 close of 4,848, just 45 points shy of a breakdown. The MACD is very oversold, and since the rest of the stock market looks well positioned we’ll continue to watch this index while giving the benefit of the doubt to the other indices, all of which are in bull markets. 

Conclusion: The pullback, following the breakout of Thursday, Sept. 13, is normal at just over 2%. But the correction may not be over and could fall to under the breakout line at 1,418 for a total pullback of over 4%. Therefore buyers should be patient. Decide what you want to buy and the price you are willing to pay and then wait. Let the market come to you.

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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