Market Violates Major Support – Should Traders Be Worried?

by Sam Collins | October 10, 2013 2:13 am

Stocks opened unchanged Wednesday, rose on the announcement of Janet Yellen as the nominee for the post of chairman of the Federal Reserve, and then traded back and forth throughout the session.

President Obama invited Democrats and Republicans to the White House for separate meetings, and that caused a bounce in the averages. But the rally was short-lived as some of the biggest gainers of the year became the subject of profit-taking. Tesla Motors (TSLA[1]) fell 3.4%, Netflix (NFLX[2]) gave up 4.6%, 3D Systems (DDD[3]) fell 4.8% (see the Trade of the Day[4]), and the iShares Nasdaq Biotechnology (IBB[5]) lost 2.3%.

At Wednesday’s close, the Dow Jones Industrial Average rose 26 points to 14,803, the S&P 500 gained 1 point at 1,656, and the Nasdaq fell 17 points to 3,678. The NYSE traded 732 million shares and the Nasdaq crossed 467 million. Advancers and decliners were close to even on the Big Board, but decliners outpaced advancers on the Nasdaq by 1.3-to-1.

Dow Chart
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Chart Key[6]

The Dow tested its 200-day moving average at 14,728 after slicing through its intermediate support line at 14,790. It bounced from its 200-day moving average, but its intraday low at 14,719 did penetrate it.

Many technicians consider the 200-day moving average to be a marker of a shift in the major trend, especially if violated on a broad base with high volume.

Nasdaq Chart
Click to Enlarge

In just five days, the Nasdaq has plunged from a 12-year high to the violation of a major support line at 3,694 (August high) and its 50-day moving average at 3,694. MACD has flashed a sell signal.

Conclusion: Normally a breakdown of the major indices’ intermediate trends, along with a serious threat to the Dow’s 200-day moving average, would be enough to send us heading for the hills. But the source of the market’s displacement is so contrived that, in the absence of high volume and a broad decline, I think it wise to consider the action profit taking.

Therefore, it offers us a fabulous buying opportunity in the sectors we like most. The Trade of the Day[7] will continue to focus on those stocks that offer the best chance for a quick recovery once the D.C. dance ends.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[8].

For a list of this week’s economic reports due out, click here[9].

  1. TSLA:
  2. NFLX:
  3. DDD:
  4. Trade of the Day:
  5. IBB:
  6. [Image]:
  7. Trade of the Day:
  8. click here:
  9. click here:

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