Prepare for a Test of the Market’s 50-Day Moving Average

The major indices snapped six weeks of consecutive gains as stocks registered losses on Friday. But even at current levels, the Dow Jones Industrial Average is just 1.5% from its record attained just one week ago.

The reason for the slowdown appears to be two-fold: fatigue following an 18% gain for the year and lower-than-expected profits for Q2 of just 2.1%, according to FactSet.  Others point to recent comments by several Federal Reserve regional presidents that indicate a “tapering” of the Fed’s stimulus program could happen as early as September.

At the close on Friday, the Dow fell 73 points to 15,426, the S&P 500 sagged 6 points to 1,691, and the Nasdaq lost 9 points at 3,660. The NYSE traded 637 million shares and the Nasdaq crossed 351 million shares. On the Big Board, advancers led decliners by a slight margin, but on the Nasdaq, decliners were ahead by 1.56-to-1.

For the week, the Dow fell 1.5%, the S&P 500 lost 1.1%, and the Nasdaq dropped 0.8%.

SPX Chart
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Chart Key

As usual, the most important index from the standpoint of technical analysis is the S&P 500. The S&P 500’s first test is at its 20-day moving average at 1,692, and on Friday, it failed that test by a small margin. Its next test of a moving average is at its 50-day at 1,652. Support also rests at the July low at 1,676.

The failure of the Relative Strength Index (RSI) to make a new high when the index hit 1,709.67 is a non-confirmation of the high — an unfavorable signal. Also unfavorable is last week’s sell signal from MACD.

DJI Chart
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The Dow industrials had problems of their own last week, especially when Friday’s intraday low penetrated the support line at 15,418. Early in the week, the index drifted through its 20-day moving average and MACD issued a sell signal. And, like the S&P 500, its RSI failed to confirm the high made on Aug. 2.

Conclusion: Despite some short-term concerns, the overall trend is still strongly bullish. However, traders and shorter-term investors should prepare for a test of the 50-day moving averages of the major indices and a nasty impact on high P/E and highly volatile equities.

Thus far, very low volume has accompanied the profit-taking, and so the selling appears to be limited in impact. However, if the 50-day moving averages fail to hold, volume and negative breadth could increase rapidly. It is time to take profits, protect gains and short highly volatile stocks — and once that’s completed, just go to the beach.

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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