Market Now Clearly on the Defensive

by Sam Collins | October 1, 2013 7:36 am

Stocks suffered a broad decline Monday as Congress appeared prepared to wait out a government shutdown. But even with the midnight deadline approaching, there was no panic among stockholders, and the S&P 500 closed out the month with a gain of 3% and a third-quarter gain of 4.7%.

Perhaps the drama in Washington played so long that investors expected a shutdown. And they were right. With a partial shutdown beginning at midnight, stocks were up in pre-market trading. However, most on Wall Street feel that the upcoming debate over raising the debt ceiling could provide a serious threat to the market’s stability.

At Monday’s close, the Dow Jones Industrial Average fell 129 points to 15,130, the S&P 500 dropped 10 points to 1,682, and the Nasdaq fell 10 points to 3,771. The NYSE traded 878 million shares and the Nasdaq crossed 536 million. Decliners outpaced advancers on the Big Board by 1.5-to-1, and on the Nasdaq, decliners were ahead by 1.2-to-1.

SPX Chart
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Our monthly 17-month moving average chart is still firmly bullish. But the month of September closed with the index 10.5% above the moving average. This is significantly higher than the two prior market highs of 8.1% at the 2000 top and 8.4% at the 2007 top.

SPX Chart
Click to Enlarge

Chart Key[1]

Volume picked up some Monday, as two major technical support lines came into play. First, the important 50-day moving average at 1,680, and then the former breakout point at 1,676. Below that is the S&P 500’s intermediate trendline at about 1,650. MACD issued a sell signal Monday, so the market is now clearly on the defensive.

Conclusion: Obviously, much depends on the debate in Congress and the hyperbole coming from the political parties. In a situation like this, the technical picture can change rapidly and violently.

I’d prefer to stay out of it until the smoke clears and suggest that with the possible exception of emerging bargains, like the Trade of the Day[2], readers stay away too. Traders should be playing the short side until the uptrend resumes.

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. Trade of the Day:
  3. click here:
  4. click here:

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