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Should Traders be Concerned About the Nasdaq’s Bearish Key Reversal?

While the Dow smashed to new highs, the junior index fell


Solid earnings from several blue-chip stocks and strong buying in the financial sector led the Dow Jones Industrial Average to its highest close since October 2007 and put it less than 1% from a record close. Gains, however, were tempered by the upcoming State of the Union speech and expectations that there would be more emphasis on taxation than control of government spending. 

The National Federation of Independent Business reported that its business optimism index for January rose less than expected. And the Labor Department said that the number of job openings in December fell from November.

At Tuesday’s close, the Dow was up 47 points to 14,019, the S&P 500 rose 2 points to 1,519, and the Nasdaq fell 6 points to 3,186. The NYSE traded 613 million shares and the Nasdaq crossed 418 million. Advancers led decliners on both exchanges by about 1.7-to-1.

DJI Chart
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Trade of the Day Chart Key

The Dow’s tight bull channel has resulted in its highest close in five and a half years. The impressive advance from the November lows took a short breather last week, trading sideways until Tuesday’s break from a small flag formation (not shown). Even though its MACD flashed a cautionary sell signal, the advance will most likely continue. 

Nasdaq Chart
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What can I say about the Nasdaq’s behavior, except that it is annoying! Instead of smashing to a new high, the junior index fell Tuesday and registered a bearish key reversal. But the trading was light, and advancers exceeded decliners by a healthy margin. For now, let’s just consider this signal as a minor setback and expect the index to overcome the resistance at 3,197.

Conclusion: Trading slowed Tuesday in anticipation of the president’s State of the Union message. Wall Street has been wary of more of what it considers “anti-business” policies from the speech, thus positive surprises could lead to a broad breakout.

This is being written before the speech, so I can only guess what could occur. As noted, any programs that are viewed as stimulating for jobs and increasing productivity could pop the indices to new high ground. But if the advance is too strong, traders may want to cash in some of their gains. As I’ve been saying, all corrections should be viewed as buying opportunities.

I’ve run out of time in today’s Daily Market Outlook, and so, as promised, I will provide examples of topping formations in the near future.

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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