Continue to Accumulate Cash in This Uncertain Market

by Sam Collins | November 14, 2012 2:38 am

Even though Q3 earnings have generally met estimates, the basic problems of the fiscal cliff and Europe’s economy persist. On Tuesday, stocks started off on a high note with strong earnings from Home Depot (NYSE:HD[1]), but hit their zenith at 11 a.m., and fell for the remainder of the day to three-month-plus lows.

At the close, the Dow Jones Industrial Average was off 59 points at 12,756, the S&P 500 lost 6 points at 1,375, and the Nasdaq was down 20 points at 2,889. The NYSE traded 677 million shares and the Nasdaq crossed 433 million. Decliners outpaced advancers on both the Big Board and Nasdaq by about 2.1-to-1.

Nasdaq Chart
Click to Enlarge

Trade of the Day Chart Key

The Nasdaq continued its downward trajectory, remaining the weakest of the major indices. The first line of support and its next test is at the twin July lows of 2,837 and 2,840. Resistance to rallies is first at the intermediate trendline (heavy solid red line) at just above 2,950, and then the conjunction of the 20-day (green line) and 200-day (light red line) moving averages at about 2,988.

NYSE Chart[2]

Since we visited the chart of the NYSE Composite on Nov. 6[3], the index has broken its intermediate trendline (heavy solid red line) and is resting just above a support line and its 200-day moving average at 7,992. A break through that support increases the probability of a test of the trading zone bordered by the 200-day moving average and the support line at 7,465.

Conclusion: Even though the major indices are oversold, there is no basis to conclude that a rally is imminent. Our internal indicators, chiefly MACD, stochastic, RSI and momentum, are weak and sentiment is negative. The CBOE Volatility Index (VIX) shows no fear and, in fact, fell 0.15 Tuesday, indicating apathy. But a rally could spring from even the hint of a positive resolution to the fiscal cliff; therefore, even though the trends are down, we would be cautious short sellers. Protect yourself with stop-loss orders and continue to accumulate cash.

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. HD:
  2. [Image]:
  3. on Nov. 6:
  4. click here:
  5. click here:

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