I couldn’t think of a good title for this post, so I thought I’d just throw in my prediction for today’s NFC championship. Go Seahawks!
Friday’s surprising sell off was reminiscent of an annoying in law that drops by for an unexpected visit. Muddy feet up on the coffee table, half drunk on Pabst blue ribbon shouting expletives at a Jerry Springer rerun loud enough for the neighbors to hear. Just when you think it can’t get any worse it does. I don’t think there was a trader out there who wasn’t surprised by the action on Friday, especially considering the way the market previously bounced back from the poor results released from Intel and Yahoo two days earlier and the subsequent follow through the day after with increasing volume. The continuation of the rally was in place, or so it seemed. Equally disappointing results out of Citigroup and GE proved to be the back breaker on Friday, as doubts about the strength of the economy crept into the minds of investors. Add to that worries over Iran, oil supply disruption in Nigeria, the inverted yield curve and all of a sudden you have a market on shaky ground. Amazing how fast sentiment can change isn’t it? I suppose that’s what makes the markets so fascinating.
I think it’s important to remain even keeled and realize that the market isn’t as in bad a shape as the drop on Friday would have you believe. Some of that move was surely the result of options expiration which can magnify the move. SOME support remains in place as well. At the same time, the move on Friday should instill some concern and cause for caution. The technical damage done was significant and it can’t be ignored. I for one had plans of increasingly leveraging with margin provided the healthy consolidation continued. It’s safe to say my strategy has changed in one day from aggressive buying to a more defensive approach.
So where do we go from here? Nobody can be sure, but looking at the charts of the major indices may provide some clues.
The Nasdaq continues to be the healthiest of the major indices. Important to note is that it closed right at support of the 50 day moving average on Friday and volume came in lighter than the day before, so no distribution for the Nasdaq. More encouraging is that the buy volume during the advance in the first days of January clearly overshadows the amount of sell volume of last week. However, with support at the 50 day moving average on shaky ground, you have to look at where the next level of support may be, which in the case of the Nasdaq lies in the area of 2200. Another 50 point drop.
The DOW which sliced through 2 major levels of support on Friday, is another story. The big blue chips have been lagging for years and they lead the decline once again. Look at the difference in buy and sell volume in the Nasdaq and Dow since January 1st. That is quite a difference! The DOW looks mighty sick right here and a drop to around 10550 looks inevitable.
The S&P in terms of price action is following a similar path to the Nasdaq, but with a more bearish tone in its buy/sell volume. It’s also right at support of the 50 day moving average. Next level of support is around 1250 if it can’t hold there. I think it’s safe to assume we will test that level in the coming days at least for a brief moment. That may happen Monday.
Strong support at 2200 for Nasdaq. However, “no distribution in the Naz”? I disagree. True, total volume was lighter than that of the previous up day, but not by much, and total volume > 50d avg volume.
Moreover, previous up day was more like the index trying to close the previous 2 gaps before continuing in the direction of the gaps (down). That had the look of massive short covering rather than true institutional buying. The late fade on last Thursday afternoon showed there were lots of institutional selling ready to bring the index down, with follow-through on Friday.
http://finance.yahoo.com/advances
Naz:
Up volume: 260,520,405
Down volume: 2,121,715,653
It’s not as simple as: if the volume on the down day is lower than volume on the previous up day, then it’s not a distribution day.
One has to also take into account the price action together with volume in the context of the previous several days, not just 1 day. Friday’s volume was greater than the average 50d volume, decliners oupaced advancers by almost 3 to 1, and down volume exceeded up volume by almost 8 to 1 ratio.
Also, the Naz suffered a 54 point loss, the biggest 1 day percentage loss since over 3 years ago. With all these facts combined, if Friday was not a distribution day, I’m not sure what is.
Whether the Naz would find support at the 50d, or at 2200, is irrelevant at this point — Friday, no matter what will happen later, was definitely a distribution day.
Thanks for your comments, you make some good points Dave. I think we both can agree that the action in the Nasdaq was clearly a red flag. I was trying to point out that is quite surprising to see volume come in as light as it did with a drop like that, especially taking options expiration into consideration. Not to mention the sell off in Google, which I think was way overblown and contributed to a portion of the drop Friday (forgot to mention Google in the post). I suppose I’m guilty of seeing the positives in an otherwise awful day. It should be noted that in the Nasdaq tracking ETF (QQQQ), there was clear distribution just as there was in the S&P and the Dow. So chalk it up as a day of distribution for the market. I’ll disagree with your remark about support lines.. they are are just as important as price/volume movement in helping to determine the strenght of the market, which after Friday’s move is a bit shaky. We’re going to need better earnings reports from the big fellas to keep this rally intact.
Tate,
Sorry for the unclear statement. When I said: “Whether the Naz would find support at the 50d, or at 2200, is irrelevant at this point — Friday, no matter what will happen later, was definitely a distribution day”, I didn’t mean to say that I disregarded the importance of potential support at the 50d or at 2200.
What I was trying to say was that, in my opinion, even if the Naz would eventually find support at the 50d or 2200, Friday was a distribution day. Or, in other words, suffering a distribution day doesn’t mean the Naz can’t find support at those levels.
I didn’t mean to say “potential supports are irrelevant and not important” at all, although it might have sounded that way from my unintended statement.
I do agree that Google’s selloff contributed to the Naz fall, and was overblown. So I bought the bounce today for a quick trade, and a nice bounce it was.
This site is cool and contains many useful information. Thanks for the great work.
Got ya Dave – I think we’re on the same page .. for the most part 🙂
Nice gutsy trade on Google – I’ll be watching for a possible sell off and bounce after posting earnings.
Hey, glad you like the site! Thanks!