Clashing Technical Signals Spark Market Confusion

Stocks fell sharply Thursday as investors cashed in profits in the technology sector, and as fear of a Federal Reserve change in its easy-money policy — due to better-than-expected U.S. domestic product growth — turned aside buyers.

Before the opening of U.S. stocks, the European Union Bank cut its key interest rate by 25 basis points, which caused a surge in the dollar.  Initial jobless claims in this country fell close to expectations.

The offering of Twitter (TWTR), up 72.7%, was the biggest technology public offering since Facebook (FB). The stock came public at $26 and closed at $44.90.

At the close, the Dow Jones Industrial Average was down 153 points at 15,594, the S&P 500 fell 23 to 1747 and the Nasdaq lost 75 points to close at 3857. The NYSE traded 909 million shares, and the Nasdaq crossed 573 million. Decliners outpaced advancers on both the Big Board and Nasdaq by 3.5-to-1.

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Chart Key

Just one day after confirming a Dow Theory buy signal, the senior index executed a Key Reversal Day (KRD) down. These seemingly contrary technical signals resulted in confusion among traders and long-term investors alike.

However, it is not unlike three of the four major new highs earlier this year. In May, a new high also was a KRD, and in July a new high was accompanied by Collins-Bollinger Reversal reversals. MACD is fading and probably will go negative soon. Immediate support is at the 20-day moving average at 15,492, then the 50-day moving average at 15,298.

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The selloff in technology stocks had an impact on the Russell 2000 and the Nasdaq. Since the charts are similar, I’ll restrict my comments to the more volatile Russell.

Despite the continuation of a fall that began on Oct. 30, after making a new high, the index is still in a solid bull channel. But prices did slice through support at the 20-day moving average (green) and now threaten the 50-day moving average at 1,076 as well as the support line of the channel at 1,060. MACD rendered a sell signal six sessions ago.


The Dow Theory confirmation of a bull market is a long-term indicator, not a trading indicator. However, it is not surprising that many readers would have interpreted yesterday’s comments as applying to the short-term, even though I concluded with the following:

“The breakout of the industrials should be followed by a higher-volume advance if the trend is to continue. It is time to go after the better-quality stocks while profit taking continues in the small- and mid-caps. But sharpen your pencils on buybacks of those stocks that are in retreat since they will probably be in the lead again.”

Yesterday, the profit taking did continue in the small- and midcaps. However, because upside volume did not accompany the blue chips and the Dow executed a Key Reversal Day, the reversal is incomplete and a near-term run of profit taking is underway for all sectors and indices.

It is likely that this pullback — like those in April, June, September and October — will be confined to the support lines of each index’s bull channel. And so there is no technical reason to conclude that the overall uptrend is in doubt. Thus investors should gear up to buy stocks that have solid fundamentals but, because of emotional selling, will provide unusually attractive prices.

Today’s Trade of the Day is an example of such a stock.

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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