Round of Profit-Taking May Precede New Highs

by Sam Collins | July 3, 2014 2:56 am

Even though the Dow industrials and S&P 500 hit new record highs on Wednesday, it was typical of a day before a holiday — low volume and limited interest in equities. Traders stayed away from the market, and the Russell 2000 and Nasdaq posted a negative close.

One sector — health care — maintained its momentum, and the iShares Nasdaq Biotechnology (IBB[1]) rose 0.5%.

Profit-taking drove many of the high-flyers lower. Facebook (FB[2]), Netflix (NFLX[3]), Priceline (PCLN[4]) and Tesla Motors (TSLA[5]) all fell. Even the airlines, one of the Dow Jones Transportation Average’s hot sectors, became the subject of selling with Delta Air Lines (DAL[6]), United Continental (UAL[7]) and Southwest Airlines (LUV[8]) down. The Dow transports fell 0.4%.

The tepid performance occurred despite a better ADP National Employment Report that showed the U.S. economy added 281,000 jobs in June, well above an expected 200,000.

August gold futures rose $5.40 to $1,331 an ounce, and silver gained $0.20, closing at $31.31 an ounce.

Today, all eyes will be on the June jobs report which, because of the holiday, will be released a day early.

At Wednesday’s close, the Dow Jones Industrial Average rose 20 points to 16,976, the S&P 500 gained 1 point at 1,975, and the Nasdaq fell 1 point to 4,458. The NYSE’s primary market traded just 595 million shares with total volume of 2.8 billion shares. The Nasdaq crossed 1.6 billion shares. On the Big Board, there were slightly more advancers than decliners, and on the Nasdaq, decliners led by a small margin.

DJI Chart
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DJT Chart
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Chart Key[9]

While the junior stock averages languished under profit-taking, the Dow Jones Industrial Average and Dow Jones Transportation Average made new highs on Tuesday. This is a fresh Dow Theory buy signal. However, it is a long-term signal, and the third failure of the Dow industrials to break 17,000 could be a prelude to a round of profit-taking.

Conclusion: The new Dow Theory buy signal does not preclude a short-term round of profit-taking before the breaking to new highs by the Dow industrials. The third attempt at the round number of 17,000 was accompanied by a slight downturn in MACD, and a key sector of the transportation index — airlines — suffered some serious selling.

The first major support zone for the Dow industrials is the December high at 16,595, to the 50-day moving average at 16,690. This range might not only be support for a temporary decline, but could evolve into a trading range that may last for weeks.

These conclusions are based on the fact that the market is overbought. It could become more overbought if this morning’s jobs numbers come in higher than anticipated. But a disappointing report could lead to a quick sell-off, so we remain in a temporary defensive trading posture.

Have a great Fourth of July.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[10].

For a list of this week’s economic reports due out, click here[11].

  1. IBB: /stock-quotes/IBB-stock-quote/
  2. FB: /stock-quotes/FB-stock-quote/
  3. NFLX: /stock-quotes/NFLX-stock-quote/
  4. PCLN: /stock-quotes/PCLN-stock-quote/
  5. TSLA: /stock-quotes/TSLA-stock-quote/
  6. DAL: /stock-quotes/DAL-stock-quote/
  7. UAL: /stock-quotes/UAL-stock-quote/
  8. LUV: /stock-quotes/LUV-stock-quote/
  9. [Image]:
  10. click here:
  11. click here:

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