The Most Surprising Thing About Friday’s Massive Sell-off

by Sam Collins | January 27, 2014 7:38 am

Stocks ended the shortened holiday week with the biggest daily decline for the Dow industrials in more than seven months. The U.S. markets opened lower, but didn’t pick up steam until the European markets closed. Most of the selling was focused on companies that did business in emerging markets.

The sell-off in the Dow stocks continued even after Microsoft (MSFT[1]) and Starbucks (SBUX[2]) beat top- and bottom-line estimates. The Dow Jones Transportation Average, which has been consistently outperforming most quality indices, was hit with a 4.1% decline, its largest one-day drop since September 2011. A big earnings miss by Kansas City Southern (KSU[3]) contributed most to the loss.

At Friday’s close, the Dow Jones Industrial Average fell 318 points to 15,879, the S&P 500 lost 38 points at 1,790, and the Nasdaq dropped 91 points to 4,128. Volume was above average for the second day in a row, with the NYSE primary market trading more than 16 million shares with total volume of 4.6 billion shares. Total volume on the Nasdaq was almost 2.5 billion shares. Decliners outpaced advancers by about 6-to-1 on both major exchanges. 

For the week, the Dow fell 3.5%, the S&P 500 lost 2.6%, and the Nasdaq was down 1.7%.

SPX Chart
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Chart Key[4]

Friday’s high-volume sell-off sliced through support at both the 50-day moving average and the upper support line of the 1,775 to 1,813 support zone. MACD is now oversold and could remain so until a price reversal occurs. The near-term trend is down, and the intermediate trend is in danger of turning down if 1,775 is violated on a close. 

DJI Chart
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The Dow’s chart is similar to the chart of the S&P 500 in that both the upper resistance line (16,100) and the 50-day moving average (16,155) have been violated. A caution flag is flying since an intermediate trend shift to down appears to be occurring. MACD is deep in the bear zone, which is often a signal that an oversold reaction rally could occur.

DJT Chart
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Most surprising of all is the sharp sell-off of the Dow Jones Transportation Average. The index just made a new high on Thursday, and reversed on Friday, closing under its 50-day moving average at 7,266. Thus, under Dow Theory rules, it confirmed a near-term downtrend and raises the caution flag on a possible reversal of the intermediate trend.

RUT Chart
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The Russell 2000 may be in slightly better shape than the other indices by holding above its 50-day moving average at 1,140. But it penetrated its first line of support at 1,145 and triggered a sell signal from MACD. It too is in danger of an intermediate trend change.

Conclusion: Friday’s sell-off puts all bullish notions on hold until the current selling abates. Traders should revert to short-to-intermediate-term bear market strategies, and long-term buyers should hold their cash for reinvestment when the current downtrend has run its course. 

The bull market is intact, but it is likely that a 10% to 12% correction from the December/January highs has begun. If the major indices close below their wide support zones, then the trend will have changed, and the minimum target would be just below each index’s 200-day moving average. 

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. MSFT:
  2. SBUX:
  3. KSU:
  4. [Image]:
  5. click here:
  6. click here:

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