Near-Term Trend Is Down — Buy or Sell?

by Sam Collins | September 30, 2013 2:32 am

Stocks closed lower on Friday as concern over the debt crisis mounted. With both Republicans and Democrats publically stating that compromise is out of the question, the potential for a partial government shutdown kept buyers away.

The University of Michigan Consumer Sentiment Index for September was slightly better than expected, but still lower than the reading for August. August personal income increased by 0.4%, which was above expectations and above the July increase of 0.2%. Wages rose 0.4% compared to a decline of 0.2% in July.

At Friday’s close, the Dow Jones Industrial Average fell 70 points to 15,258, the S&P 500 dropped 7 points to 1,692, and the Nasdaq lost 6 points at 3,782. The NYSE traded 647 million shares and the Nasdaq crossed 399 million. On the Big Board, decliners outpaced advancers by 2-to-1, and on the Nasdaq, decliners were ahead by 1.6-to-1.

For the week, the Dow fell 1.3%, the S&P 500 lost 1.1%, and the Nasdaq rose 0.2%.

Dow Chart
Click to Enlarge

Chart Key[1]


On Friday, the Dow Jones Industrial Average closed below its 50-day moving average. And since Thursday was an up day (the first following five days of declines) and Friday failed to follow through with another up day, the short-term trend for the Dow has turned down.

A short-term decline could take the index to its next major support at 14,790 (a line connecting the lows of March, April, June and August/September), which would be a decline of 5.9% from its recent high. If that was to occur, the percentage decline would closely match the two prior adjustments made by the S&P 500 earlier this year (see Sept. 23 chart of the S&P 500[2]).

DJT Chart
Click to Enlarge

The chart of the Dow transports has not broken either of its supporting moving averages, the 20-day (green) or the 50-day (blue). Therefore, the Dow Theory has not yet confirmed the change in the short-term trend. The most recent chart formation is a bullish flag with important support at 6,490, its 50-day moving average. MACD is close to issuing a sell signal.

Conclusion: Two major indices, the Dow Jones Industrial Average and the S&P 500, have experienced a short-term trend change to “down.” But the decline has not been confirmed under the Dow Theory, and downside volume has been light relative to the prior advance.

Until now, the market has assumed that Congress and the president would work out a compromise. If they don’t work out an agreement that avoids a government shutdown, then the big money that has thus far supported prices will likely withdraw its support and the technical support line could collapse.

So far the long-term and intermediate-term trends are bullish and the short-term trend is down. Traders should play the short side of the market, but investors should prepare to buy stocks at bargain prices.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. [Image]:
  2. see Sept. 23 chart of the S&P 500:
  3. click here:
  4. click here:

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