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Technicals Saying, ‘Keep Out!’

Nasdaq's breakdown, S&P 500's key reversal day and Dow's non-confirmation are clears signs


On Tuesday, stocks closed slightly higher for the first time in four days. The S&P 500 gained just 0.4%, and the Dow Jones Industrial Average rose 0.1%. But the Nasdaq, which led the market on the way down, climbed 0.8%.

The Wall Street Journal blamed the recent weakness on “concerns over valuations ahead of what is expected to be a lackluster first-quarter earnings season.” Analysts at FactSet expect Q1 earnings of stocks in the S&P 500 to decline 1.3% versus a year ago.

Amazon (AMZN), Google (GOOG) and LinkedIn (LNKD) rose sharply after three days of being pummeled. But the biotech stocks, which also have been hit hard, failed to respond. The iShares Nasdaq Biotechnology (IBB) fell 0.4%. The top performer was the utilities sector, with the Utilities Select Sector SPDR (XLU) up 1.4%. Utilities are generally considered to be a defensive group purchased in times of fear.

At Tuesday’s close, the Dow Jones Industrial Average gained 10 points at 16,256, the S&P 500 rose 7 points to 1,852, and the Nasdaq jumped 33 points to 4,113. The NYSE traded a modest 733 million shares on its primary market with total volume of 3.7 billion shares. The Nasdaq crossed 2.2 billion shares. On the major exchanges, advancers outpaced decliners by about 2-to-1.

Nasdaq Chart
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Chart Key

Since early March, the Nasdaq has formed a series of lower highs and lower lows. Early in the decline, the channel that was created looked much like a bullish flag. However, after it sliced through its 50-day moving average and closed on the support line at 4,080 on Friday, it must be interpreted as a breakdown and the beginning of a rounding top. The internal indicators — MACD, stochastic and momentum — are all negative.

DJU Chart
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In contrast to other equity indices, the Dow Jones Utility Average is in a powerful uptrend. The index closed at an all-time new high Tuesday. Support rests first at its 20-day moving average at 526, then the support line at around 520, and finally, its 50-day moving average at 517.

Conclusion: The market is under the general influence of profit-taking and outright selling of high-P/E stocks, namely high-tech stocks, biotechs, small caps and high-momentum equities.

While some of these stocks are represented in the S&P 500 as well, they are the names that ran the Nasdaq and Russell 2000 to big percentage gains in February. The market is thus “Nasdaq-centric,” a term coined by my colleague Michael Ashbaugh, meaning that an upturn depends upon the recovery of those high-momentum stocks.

But there are more serious technical developments. The failure of the Dow industrials to break to new highs, missing the mark by just 2 points, resulted in a “Dow non-confirmation,” which is a serious reversal. And the S&P 500’s “key reversal day” on Friday is another negative for the bulls.

If the S&P 500 can hold support at 1,850 and stay above its 50-day moving average at 1,840, then the bulls have a chance of turning the market positive. But in light of the mediocre rebound on Tuesday, elect to stay in cash until the technical picture turns positive.

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.

Article printed from InvestorPlace Media,

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