Sell Into Rallies Until This Happens

by Sam Collins | February 5, 2014 2:52 am

Stocks recovered part of the losses sustained in Monday’s sell-off, which was the largest in months. Some of the rebound was due to better corporate earnings and some was for technical reasons.

Emerging market currencies rose against the U.S. dollar following crushing blows to the Turkish lira and the South African rand on Monday.

U.S. factory orders fell in December, but that had little impact on stock prices. The employment numbers will be of interest to investors, starting with the ADP employment report today and the federal government’s monthly unemployment numbers on Friday.

At Tuesday’s close, the Dow Jones Industrial Average was up 72 points to 15,445, the S&P 500 rose 13 points to 1,755, and the Nasdaq jumped 35 points to 4,032. The NYSE traded 4.1 billion shares, and the Nasdaq crossed 2.2 billion. On the Big Board, advancers outpaced decliners by 2.1-to-1, and on the Nasdaq, advancers were ahead by 1.7-to-1.

Nasdaq Chart
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Chart Key[1]

The Nasdaq has broken support at its 50-day moving average at 4,099 and the support –now resistance line –at 4,070. It is holding its intermediate trend line at 4,000. MACD is deeply oversold.

Dow Chart
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The Dow violated its 50-day moving average and support at 16,120, slicing through both like a knife through butter. It then proceeded to violate its 200-day moving average for the first time since Dec. 28, 2012, and with that, the support line at 15,720. Now all of these support lines have become resistance lines. Like the Nasdaq, the MACD indicator is grossly oversold.

Conclusion: Momentum indicators, including MACD, RSI and stochastic, are oversold and telling us that a recovery rally should get under way. However, the price action is weak with volume on rallies lighter than on declines. In order for the bulls to turn the intermediate trend to neutral, they must drive the Dow industrials back above their 200-day moving average a 15,474. And the S&P 500 must maintain its position above its 200-day moving average at 1,707 (see Feb. 4 Daily Market Outlook[2]) and close above the line at 1,775.

Currently, the path of least resistance is lower. The intermediate trend is down, and the long-term trend is threatened. For now, selling into rallies, like we saw Tuesday, is the only course until the market’s price action demonstrates that it can establish a meaningful support zone in which to launch a recovery.

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. see Feb. 4 Daily Market Outlook:
  3. click here:
  4. click here:

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