Market Executes Key Reversal Day, What’s Next?

by Sam Collins | December 4, 2012 2:54 am

Stocks opened higher Monday, but faded quickly following the release of the November ISM index. ISM’s Purchasing Managers’ Index (PMI) fell to 49.5 last month, but economists had only expected a decline to 51 in November versus 51.7 in October. Chemical producers, utilities and industrial stocks underperformed for the day.

At Monday’s close, the Dow Jones Industrial Average was off 60 points at 12,966, the S&P 500 fell 7 points to 1,409, and the Nasdaq lost 8 points at 3,002. The NYSE traded 656 million shares and the Nasdaq crossed 383 million. Decliners were ahead of advancers on the Big Board by 1.5-to-1 and led on the Nasdaq by 1.2-to-1.

DJI Chart
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Trade of the Day Chart Key

The Dow opened higher than Friday’s high and closed lower than Friday’s low, meeting the requirements of a short-term sell signal called a key reversal day. The reversal is sometimes short-lived, as prices often fall for several days before resuming the uptrend. But when the reversal occurs through an important technical barrier, like the 200-day moving average, it often takes on more importance.

Also note that the stochastic is hooking down and could render a sell signal if prices head south today. The next important support for the Dow is the line drawn from the series of lows made in June and July at 12,780.

Conclusion: The market is overbought on each of our internal indicators. Therefore, it is not surprising for an index to execute a reversal. Although the Nasdaq did not execute a reversal Monday, the S&P 500 triggered a key reversal day. Its reversal was from its 50-day moving average and tells us that the index will probably fall to the next important support — the 200-day moving average at 1,385.

Both reversals are from intermediate tops, thus it is important that the support lines at Dow 12,780 and the S&P 500’s 200-day moving average at 1,385 hold. A failure to hold could lead to a pattern of lower highs and lower lows, and set up the market for a test of June’s low.

It is time for the bulls to be very cautious and for aggressive bears to do some trading from the short side of the market. The bulls are now on the defensive.

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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