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Get Ready to Sell Into Quick Earnings Reactions

Before we see a serious rally, the market is going to have to test some technical levels below


On Tuesday, small- and mid-cap stocks underperformed for the second day. The Russell 2000 and the Nasdaq fell 1.2% and 1.4%, respectively. Like on Monday, U.S. stocks were influenced by a European shortfall. Germany’s disappointing industrial production led to a decline, and on Tuesday’s losses followed the largest monthly decline in the UK’s Industrial Production since January 2013.

The Nasdaq Biotechnology Index (IBB) lost 2.1%. But defensive areas gained, like the utilities sector which rose 0.6%. Some traders worried that Q2 earnings might not meet expectations, but Alcoa (AA) reported 18 cents per share vs. an expected 12 cents per share, and revenues of $5.8 billion vs. an expected $5.6 billion. The stock rose 0.7% in the regular session and added another 2.4% in late trading after its report. FactSet estimates that S&P 500 companies will report a 4.8% rise in Q2 earnings. They also reported that Q1 earnings increased by 2.1%.

At the close, the Dow Jones Industrial Average fell 118 points to 16,907, the S&P 500 was down 14 points at 1964, and the Nasdaq lost 60 points to hit 4391. The NYSE traded total volume of 3.3 billion shares and Nasdaq crossed 2.2 billion. On the Big Board, decliners outnumbered advancers by 1.5-to-1, but on the Nasdaq, decliners outpaced advancers by 3.8-to-1.

S&P 500 support
Click to Enlarge

Chart Key

Important support for the 500 is the zone from 1925 to 1950. A test of the lower line of the zone would also test the 50-day moving average at 1,922. A Fibonacci retracement of 50% equals 1,924.


There was, and still is, enormous skepticism regarding FactSet’s expectation of a rise in Q2 earnings of 4.8%. It is important that the major corporations make their estimates, since the Fed continues to wind down bond purchases, and there is even talk of a small rate increase (and its negative impact on the market).

Some just always see the glass half-empty.

Nevertheless, a Fibonacci retracement of 50% is, I think, not only possible but likely. That’s just a 3%-plus fall from the high at 1986. Translating a 50% Fib to the Russell 2000 (not shown) equals 1148, landing squarely on its 50-day moving average line. Yesterday’s fall of 15.44 points broke support of the 20-day moving average at 1,181.82 and issued a definite MACD sell signal, setting up the Russell for a test of the support at its 50-day line.

Alcoa’s better-than-expected earnings might result in a bounce at today’s opening. However, the near-term trend is down, and traders should sell into any quick reactions to earnings, since the areas mentioned should normally be tested before we see a serious rally.

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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