Intermediate Trendline Threatens to Break

by Sam Collins | November 1, 2012 2:45 am

Stocks opened strong Wednesday in what was supposed to be a “shakedown session” following two days when both the Nasdaq and NYSE were closed. But sellers dominated until midday when bargain hunters snapped up some key equities.

However, buyers were generally unable to overcome the deficit, and at the close, the Dow Jones Industrial Average was off 11 points at 13,096, the S&P 500 broke even at 1,412, and the Nasdaq fell 11 points to 2,977. Volume on the NYSE was higher than expected at 850 million shares, and the Nasdaq traded 461 million. Advancers exceeded decliners by about 1.3-to-1 on both exchanges.

 Nasdaq Chart

Trade of the Day Chart Key

October was not kind to investors. Following a false breakout in September, the Nasdaq fell 6.8% where it now rests on its 200-day moving average at 2,976.93.

It’s not unusual for an equity index to have a correction that takes it below its 200-day moving average. In fact, it occurred in early June when the Nasdaq not only penetrated the 200-day moving average, but on an intraday plunge also poked through its intermediate trendline. 

The June sell-off shook weak holders (i.e., the public) from the market and set the stage for a major institutional rally that ended with the new high in September. Currently, the intermediate trendline rests just 47 points under Wednesday’s close and threatens to break to the trendline.

SPX Chart
Click to Enlarge

The S&P 500’s big September gain was due to the mid-month Fed decision to implement another round of quantitative easing. Even though the FMOC reiterated its intention to continue easing and extend low interest rates “even beyond a recovery,” it is obvious that the easing is losing its impact. Nevertheless, our monthly chart of the S&P 500 with its 17-month moving average shows that the bull market is intact. 

Conclusion: A correction of 5% to 10% following a new high is normal. And the monthly chart of the S&P 500 illustrates the minor nature of October’s correction when compared to the overall trend.  

We are entering the period in which it is historically the best time to buy stocks. “Sell in May and go away” terminates on Nov. 1.

However, too many uncertainties prevent us from making a major commitment, i.e., the election, the fiscal cliff, and the cost of Sandy’s rampage up the East Coast, along with Europe’s problems and a slowing economy in China. But a reversal similar to June’s would entice us to part with some of the cash that is currently earning nothing.

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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