Stick to Buying on Weakness Unless This Happens

by Sam Collins | March 25, 2014 2:58 am

Blue-chip stocks held firm Monday, while the Nasdaq was pummeled with a loss of 1.2% and the S&P 500 fell 0.5%. The problem sector was the biotechs, which after a big six-month run, have become the subject of Congressional scrutiny.

Gilead Sciences (GILD[1]) received complaints alleging overpricing of its hepatitis C drug. It bounced back slightly Monday after being hit hard on Friday. But the group, as illustrated by the iShares Nasdaq Biotechnology (IBB[2]), declined 2.8%. The ETF has fallen 9.5% so far March, but it gained more than 65% in 2013.

Technology was down in the morning but rallied in the afternoon. The rebound was led by some of its blue chips, namely Apple (AAPL[3]), IBM (IBM[4]) and Microsoft (MSFT[5]).

At the close, the Dow Jones Industrial Average fell 26 points to 16,277, the S&P 500 dropped 9 points to 1,857, and the Nasdaq was hit with a 50-point loss at 4,226. The NYSE traded total volume of 3.4 billion shares, and the Nasdaq crossed 2.4 billion. Decliners outpaced advancers by 1.7-to-1 on the Big Board and 2.8-to-1 on the Nasdaq.

Nasdaq Chart
Click to Enlarge

Chart Key[6]

The Nasdaq violated its support line at 4,243 and even penetrated its 50-day moving average at 4,221. Its intraday low was 4,191, but it closed about 5 points above it 50-day moving average. The penetration of 4,243 looks much like a break of a head-and-shoulders formation, but it is not perfect. However, assuming the worst, the target for Monday’s break is 4,114 if the break is confirmed by a close below the 50-day moving average at 4,221.

SPX Chart
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The S&P 500 has failed to penetrate its high and pulled back to the support line at 1,850. A break of the zone at 1,813 to 1,850 would also result in piercing the 50-day moving average, now at 1,833.

Conclusion: Monday’s weakness, led by the small- and mid-cap stocks, could be the beginning of a correction. However, jumping the gun is never a good idea since reversals back up are common in bull markets. So far Monday’s negative action, which was generally confined to the biotech sector, has not rolled into a general market decline. It was not accompanied by a burst in selling or a general sell-off of other stable industry groups. Unless the S&P 500 and Nasdaq experience a breakdown of their support zones, we will stick with the plan of buying on weakness.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[7].

For a list of this week’s economic reports due out, click here[8].

  1. GILD:
  2. IBB:
  3. AAPL:
  4. IBM:
  5. MSFT:
  6. [Image]:
  7. click here:
  8. click here:

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