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Correction Likely Isn’t Over, but Neither Is the Bull Market

Dow could pull back to 200-day moving average before Halloween for a 5% correction


Stocks opened on a strong note Thursday, ignited by weekly initial jobless claims that were at their lowest level since January 2008. But the advance failed to hold, and steady selling throughout the day erased the initial gains. The Dow industrials posted their fourth straight loss.

At Thursday’s close, the Dow Jones Industrial Average was off 19 points at 13,326, the S&P 500 was unchanged at 1,433, and the Nasdaq lost 2 points at 3,049. The NYSE traded 645 million shares and the Nasdaq crossed 362 million. Advancers were ahead of decliners on the NYSE by 2-to-1 and on the Nasdaq by 1.5-to-1.

DJI Chart
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Trade of the Day Chart Key

Even though the advance that began in September has slowed to a crawl, the Dow Jones Industrial Average is still holding above its breakout/support line at 13,275. Volume is low but breadth, at 2-to-1 positive on Thursday, is holding up.

The industrials have resistance at the September high of 13,665 with initial support at the uptrending 50-day moving average, now at 13,309. MACD is on a sell signal, but unless downside volume picks up and prices penetrate the breakout line, the daily price movement is consistent with a standard consolidation.

DJT Chart
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The recovery of the Dow Jones Transportation Average takes a lot of the pressure off of the bulls. Even though the transports have not confirmed the industrials’ high, according to Dow Theory, they have not negated it either. The MACD buy on the transports is a positive and could be telling us that buyers will pop the index through the current resistance at its 50-day moving average at 5,053 (blue line).

Conclusion: Despite several triple-digit losses and four consecutive days down, the Dow is in a good position to keep any correction within the bounds of what is considered normal, which is 3% to 5%. So far, the Dow has only declined 2.5% from its high. Thus, before Halloween, the industrials could pull back to the 200-day moving average at 12,925, a decline of 5%, and still be within the limits of a standard correction.

Bulls should stand aside while the market consolidates. Bears should be trading from the short side.

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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