Watch for This Sign That the Correction Is Over

Stocks opened strong Wednesday, moving steadily higher until mid-morning, when a broad sell-off began. The selling was initially viewed as normal positioning by floor traders who sold energy stocks into a weak crude oil market. But it intensified when there were reports of an attack on the Canadian parliament.

After the close of trading, the pullback was viewed by most analysts as the market’s natural response to four days of heavy buying. Tuesday marked the biggest one-day gain of the year for the S&P 500 and the biggest daily advance in the Nasdaq since January 2013.

Yahoo (YHOO) jumped 4.5% after reporting better-than-expected Q3 results. Dow Chemical (DOW) fell 1.2% despite beating estimates, and Boeing (BA) suffered the same fate, falling 4.5%. Biogen Idec (BIIB) lost 5.4% after reporting a quarterly beat on strong sales of its multiple sclerosis drug.

Finally, Broadcom (BRCM), my Trade of the Day, rose 4.5% after handily beating analysts’ forecasts for both earnings and revenues.

The European Central Bank (ECB) denied rumors of further stimulus, though reports said it is still considering purchasing corporate bonds.

At Wednesday’s close, the Dow Jones Industrial Average fell 153 points to 16,461, the S&P 500 dropped 14 points to 1,927, the Nasdaq was off 37 points at 4,383, and the Russell 2000 fell 16 points to 1,097.

The NYSE’s primary market traded 802 million shares with total volume of 3.7 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, decliners outpaced advancers by 2.2-to-1, and on the Nasdaq, decliners were ahead by 2.8-to-1.

SPX Chart
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Chart Key

The S&P 500 ended a four-day winning streak with an intraday high of 1,949, just 1 point from a perfect 66.6% Fibonacci retracement of the September-to-October decline. And the index closed 1 point above the top of the support zone at 1,910-1,926.

The next resistance is at the 20-day moving average at 1,929, but that is a minor mark and of interest solely to day traders. The next significant goal is the 50-day moving average at 1,967. A penetration of the 50-day would be a strong indication that the correction is over.


Most major indices closed near their intraday lows Wednesday — not a good day trading the bullish side. In the intermediate term, assuming that a positive test of the October low is needed to prove a trend change to “up,” the support line at 1,926 could give way as long as the more important inflection point at 1,907 — the 200-day moving average — holds.

With such high volatility, the market is in the hands of day traders. And they appear to be doing well since clear lines of support and resistance are guiding them to huge profits. Longer-term investors should not chase the rally and buy only on dips. Investigate before you invest.

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.

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