With the major indices teetering near the edge of support levels that would keep the intermediate uptrend intact, the negatives once again become accentuated. Housing is slowing, earnings guidance is a concern, Iran fears, more rate hikes…. These are all real concerns that the market will have to digest, which it is doing now. Overall, the selling hasn’t been particulary intense and I’ve been impressed with the way the market has held up despite earnings disappointments from Yahoo, Google, Intel, Amazon, etc and the subsequent breakdown in the charts of these bellweathers (I’d be willing to bet Google and Apple both have another 5 – 10% of correcting left to do). It should be noted that after the bell today, Cisco reversed the trend of disappointing results by beating expectations (it’s up 5% after hours).
Today was more concerning though with the first clear distribution day of February as market leaders in energy, metals, basic materials sold off hard. One day of selling doesn’t signal a major rotation in the market, but it’s certainly something to keep an eye on. Some key energy leaders appear to be on the verge of breaking down (see SWN, XTO and NBR).
The 50 day moving averages have been taken out on the major indices, setting up a move to the next major levels of support, which happens to be around the multi year highs that were cleared back in late November. Lets have a look at these levels.
Notice the drop below the 50DMA in the Nasdaq which now appears to be shaping up as a firm level of resistance. The action in the market over the last several days indicates a move to the next major level of support is highly likely. This is a very iimportant line of defense for the Nasdaq and holding up at that level would keep the uptrend that began last October intact. How Cisco’s report will affect the market tomorrow will be very telling. A gap up at the open is probable, but will the gains hold? In a weak market, those gains will typically vanish by the close. Tomorrow, the market will provide another clue to its strength.
The S&P is destined to test its next major level of support in the 1245 – 1250 range and it’s not far from there. If it can’t hold that level, the S&P drops back into that multi year trading range
and likely falls further to support at the 200DMA around 1225.
The trend of lower lows in the Dow is a concern. At this point, it’s highly possible that the Dow tests support around 10,600. Should a bounce in the Dow occur, watch for further confirmation of a downward trend if the Dow peaks at a lower point than it did on Feb 1st.