Market Issues Short-Term Sell Signal

by Sam Collins | July 2, 2013 7:00 am

Stocks closed higher on Monday as a result of stronger economic data from Europe and the United States. China reported mixed manufacturing results, but the report had little impact on stocks here.

U.S. June manufacturing data reported by the Institute for Supply Management rose in June to 50.9. A reading over 50 is considered to indicate expansion. Construction spending increased 0.5% in May.

At Monday’s close, the Dow Jones Industrial Average had gained 65 points at 14,975, the S&P 500 rose 9 points to 1,615, and the Nasdaq gained 31 points at 3,434. The NYSE traded 713 million shares and the Nasdaq crossed 413 million. Advancers exceeded decliners on both major exchanges by 2.6-to-1.

SPX Chart
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Chart Key[1]

Despite a reversal up in mid-June, the S&P 500 struggles to overcome its 50-day moving average. For the third time in as many days, it has turned away from this important line at 1,623 despite a bullish, but lagging MACD.

The pattern of a bearish channel (lower highs and lows) started at the May high. On Monday, the 20-day moving average moved down and through the 50-day, triggering a short-term sell signal.

DJT Chart
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The same bearish channel appears on the Dow Jones Transportation Average. I’ve not drawn the lower channel, as in the S&P, because of the significance of the triple-bottom at 5,935.

Note the failure of the transports to close above 6,273, and the short-term sell signal from the 20-day moving average, which is similar to that of the S&P 500. MACD is turning up, a bullish sign.

Conclusion: All of the major indices are knocking on the door of their respective 50-day moving averages, but none has yet been successful in opening it. The Dow’s is at 15,052, the S&P 500’s is at 1,623, and the Nasdaq’s is at 3,404. But of most concern is the failure of the transports, since it is this index that is most often considered to be predictive of economic activity three to six months down the road.

If the transports don’t penetrate this barrier soon, it may not only be a long summer, but a second half characterized by a string of negative economic data and a new leg down in stocks. But a thrust higher could get the bull back onto the field with renewed energy. Traders and investors alike need to focus on the 50-day moving average of each major index.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

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