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Take Advantage of False Pullbacks

Use sell-offs to establish solid long positions in quality stocks

Stocks fell slightly on Thursday, backing away from recent highs in anticipation of Federal Reserve Chair Janet Yellen’s speech at the annual meeting of the world’s central bankers in Jackson Hole, Wyoming.

She is not expected to announce a rate hike, but in the past, analysts have closely examined every word for clues as to the future course of Fed policy. Many economists believe that one more rate hike is due this year, and that it will probably occur in December, following the presidential election.

The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) fell 1.2%, impacted by criticism of drug price increases. Mylan NV (NASDAQ:MYL) has come under scrutiny for its price increases on its lifesaving EpiPen injection. MYL continued its losses, down 0.7%.

Oil prices rebounded 1.2% to $47.33 a barrel after falling for two of the past three sessions.

At Thursday’s close, the Dow Jones Industrial Average was down 33 points at 18,448, the S&P 500 lost 3 points at 2,172, the Nasdaq fell 5 points to 5,212, and the Russell 2000 gained 3 points at 1,240.

The NYSE Composite’s primary exchange traded 718 million shares with total volume of 2.9 billion. The Nasdaq crossed 1.5 billion shares. On the Big Board, advancers outpaced decliners by 1.3-to-1, and on the Nasdaq, advancers led by 1.1-to-1. Block trades on the NYSE fell to 4,481 from 4,854 on Wednesday.

IWM Chart
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MDY Chart
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While the major indices declined on Thursday, the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) and SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) advanced. These ETFs have been trading in a narrow bull channel since the beginning of July with major support at their respective 50-day moving averages. Volume has been mixed, but a bit higher on the buying days in MDY. MACD is flat on both.


The narrow bull channel has existed for about eight weeks. That’s a long time for a narrow technical feature to dominate trading. Slightly better-than-expected earnings have not pushed stocks through the resistance line. And sour news like the current drug pricing review has not broken the support line of the channel.

With so much cash on the sidelines, it is difficult to imagine that a break will eventually occur on the downside. That is why investors should take advantage of false pullbacks (like the current one in drug stocks) to establish solid long positions in quality stocks.

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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