Should Investors Sweat the Market’s Reversal Day?

by Sam Collins | May 10, 2013 2:44 am

Stocks fell Thursday after failing to hold early afternoon gains. They reversed shortly after a rumor spread that The Wall Street Journal was about to publish an article by a “well-known reporter, who is considered to be a Fed-insider,” indicating that the Fed is contemplating changes to its quantitative easing program. The expected report was not published.

Each of the major indices made a new intraday high before closing slightly lower on the day, despite solid economic numbers. And the Bank of England kept its monetary policy unchanged. 

At the close, the Dow Jones Industrial Average was off 23 points at 15,083, the S&P 500 fell 6 points to 1,627, and the Nasdaq was down 4 points at 3,409. The NYSE traded 669 million shares and the Nasdaq crossed 401 million. Decliners led advancers on the Big Board by 1.8-to-1, and on the Nasdaq, decliners were ahead by 1.5-to-1.

SPX Chart
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Trade of the Day Chart Key[1]

Following a five-day advance, the S&P 500 closed lower Thursday and triggered a “reversal day.” A reversal day occurs when an index or stock makes a new high but closes lower.

Reversal days are common in bull markets and usually have limited significance. They are often confused with the “key reversal day,” which opens higher than the previous day’s high and closes lower than the previous day’s low.

Note that the first support for the index is at 1,614, then 1,598, followed by the 20-moving average at 1,587, and the 50-day moving average at 1,567.

SOXX Chart
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While everyone seemed to be focusing on the major indices, the iShares PHLX SOX Semiconductor Sector (NASDAQ:SOXX[2]) jumped to new highs. Nine of the top ten holdings of the index made gains, and while its RSI is slightly overbought, MACD is bullish. Friday’s breakaway gap from a huge cup-and-handle formation should take the index and its components to higher ground.

Turning to the sentiment indicators, they are most certainly overbought. The National Association of Active Investor Managers is at 82% bullish (above 70% is considered extreme bullishness). The AAII Sentiment Survey is at 40.8% bullish, up 9.8 percentage points to an eight-week high, while bearish sentiment plunged 8.5 percentage points to 27.4%. And margin debt (borrowing to buy stocks) is close to a record high on the NYSE, with the last two record highs at the market tops in 1999 and 2007, according to[3].

Unfortunately for the bears, the only statistic that counts is the market’s price action, and that is extremely bullish. That’s not to say that we couldn’t have a round of profit-taking in a temporarily overbought market, but I wouldn’t look for a major correction quite yet. 

After the closing bell, Maria Bartiromo breathlessly jumped on her first interviewee saying, “Well, is this it? Is this the beginning of The Correction?” 

“Well it could be,” was his reply.

Yes, and it might not be, Maria. Give me a break! After five days up we get a 23-point down day. The correction will come, but not when Maria expects it.

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].

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