2 Bearish Reversal Signals Warn of a Correction

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The S&P 500 closed down for the first time in five sessions Wednesday, the Russell 2000 fell 1.4%, and the Dow also fell after making a new all-time intraday high.

The decline was attributed to the Federal Reserve’s newest assessment of the economy, which was more positive than anticipated. A positive outlook increases the likelihood that the central bank could taper its bond-buying program. There was no reference to the impact of the government shutdown, and the governors made no current change in the program. The next Fed meeting is scheduled for December, although cuts could occur without a formal meeting.

All 10 sectors of the S&P 500 were down, but losses were relatively small. Technology and biotech stocks were sharply lower, with the iShares Nasdaq Biotechnology (IBB) down 2.1%.

At Wednesday’s close, the Dow Jones Industrial Average was off 62 points at 15,619, the S&P 500 fell 9 points to 1,763, and the Nasdaq was off 22 points at 3,931. The NYSE traded 696 million shares and the Nasdaq crossed 485 million. Decliners were ahead of advancers on the Big Board by 2.4-to-1, and on the Nasdaq, decliners were ahead by 2.8-to-1.

DJI Chart
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Chart Key

The Dow industrials made a new all-time high, gapping up on the opening Wednesday and closing lower, which is a “key reversal day.” A key reversal occurs when a stock or index opens higher than the prior high and closes at a minus.

Our proprietary internal indicator, the Collins-Bollinger Reversal (CBR), also issued a sell signal. The Collins-Bollinger-Reversal is an indicator that I developed that only occurs when an intraday high (or low) penetrates a Bollinger Band and then closes in the opposite direction of the penetration. There is also a volume factor involved, but that is merely a refinement.

On the chart, note the other instances when the CBR made itself known (red arrows) both on the buy and sell side of the market.

SPX Chart
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The S&P 500 also flashed a key reversal day accompanied by a CBR sell signal. Note the accuracy of the CBR signals this year.

Conclusion: In a highly charged political environment, we should be prepared for anything. Wednesday was a good example of that, as all of the major indices executed reversals of one type or another. Of real concern is the double signal of a key reversal day accompanied by the CBR indicator.

Wednesday’s reversal could be quickly reversed by a strong move up and the establishment of another new high. But, for now, these signals place everything on hold as we wait for the market to demonstrate whether it has the bullish power to overcome these ominous warnings of a correction.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2013/10/daily-stock-market-news-2-bearish-reversal-signals-warn-correction/.

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