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Long or Short, the Markets Are Dangerous

Support is breaking, but political sentiment could flip the switch


As worries mounted that the White House and the Republican House of Representatives were making little progress on a budget deal, the Dow Jones Industrial Average suffered another triple-digit decline. Along with domestic problems, the markets had to contend with falling European markets, which resulted from a delay on a decision by finance ministers to release funds for Greece.

Better-than-expected weekly initial jobless claims and a lower-than-expected trade deficit were ignored as the DJIA fell 121 points to 12,811, the S&P 500 lost 17, closing at 1,378, and the Nasdaq fell to 2,896, down 42 points. The NYSE traded 757 million shares and the Nasdaq crossed 459 million. Decliners exceeded advancers on both the Big Board and the Nasdaq by 2.7-to-1.

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Trade of the Day Chart Key

In just two days, the Nasdaq plunged through its 200-day moving average on a gap, then sliced through its intermediate trend line. The next support is at the twin July lows of 2,837-2,840. The August low at 2,890 offers very mild support that we can’t count on to hold such a massive breakdown that apparently even sliced through the 61.8% Fibonacci number (June-to-September rally) at 2,907.

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The Dow violated its support, now resistance, at 13,040, and the 200-day moving average at 12,992. There is weak support at the August low of 12,779, but the next significant support is at the line drawn from the July-to-August lows at 12,450 to 12,522. Going back to the break at 13,040: If this is a neck line of a head-and-shoulders top, then the target for the breakdown is no less than 12,420. A Fibonacci 61.8% retracement of the June-to-September rally is 12,655.

Conclusion: The breakdown of the major indices accelerated yesterday as the DJIA, Nasdaq, and the S&P 500 (see Nov. 8 chart) all plunged through major support. Despite the oversold condition, yesterday’s close at the day’s lows illustrates the lack of support at current levels. The volume down vs. volume up on Thursday was 9.8-to-1 on the NYSE, and total volume in the last two days has been higher than the average volume for the last 30 days. Despite all of the selling, the “Fear Index” (VIX) has hardly budged, and the AAII sentiment index turned in the highest optimism levels since August. This all adds up to an intermediate-term (1- to 3-month) trend change.

Day traders may still take short positions, but with very tight stops, since the market could have a sharp rally on rumors of a political settlement of the “fiscal cliff.” Be careful out there — the danger level on both the long and short side of the market is extremely high.

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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