Market Insight

Stocks Slice Below 200 DMA Line

Nasdaq - 5th Consecutive Weekly Decline — Nasdaq – 5th Consecutive Weekly Decline

Friday, November 09, 2012
Stock Market Commentary:

The major averages sliced below support and continued tracing out their 8-week downtrend (series of lower highs and lower lows) as the bears remain in clear control of this market. It is important to note that the market is “oversold” and due for a bounce. Keep in mind that oversold markets can get a lot more oversold before they bounce. Put simply, the path of least resistance is down until the major averages trade above their respective downward trendlines and their 50 DMA lines. Until then, by definition the trend remains lower. So far, this appears to be an ugly pullback after a big run evidenced by the fact that the major averages are still less than 10% below their recent highs. Most people define a correction when a market (or stock) falls more than 10% below a recent high. So far, the reaction to earnings has been outright awful which suggests investors are not happy with the results. Bottom line: Investors want to know what catalyst (s) will help the market rally from here.

Monday- Wednesday’s Action: Stocks Tank After Election

On Monday, stocks were quiet and ended with modest gains after spending most of the session trading in and out of positive territory. The economic data came in just shy of estimates. The ISM service index slid to 54.2 last month which just missed the Street’s estimate of 54.5 and was below September’s reading of 55.1. On a positive note, it was encouraging to see the number come in above the boom/bust level of 50, signaling expansion. According to CNBC.com: on average, the DJIA and S&P 500 have performed better under Democratic presidents with the Dow returning an average gain of 74 percent and the S&P returning a gain of 80 percent. That compares with the Republican average gain of 47 percent for the Dow and 41 percent for the S&P. The data for the DJIA dates back to 1901, while the S&P 500 data dates back to 1928.

Stocks rallied on Tuesday, helping the major averages bounce off support (their respective 200 DMA lines). Stocks were benefited when EU woes eased a bit after EU Economic and Monetary Affairs Commissioner Olli Rehn made positive comments regarding Greece’s ability to fix its troubled economy. As expected (I have held this stance and repeated it many times since Romney became the Republican nominee) that Barack Obama will easily beat Romney. It was very interesting to see stock futures edge lower every time Obama took the lead and edged higher whenever Romney moved ahead.

Stocks were smacked on Wednesday, suffering one of their largest declines of the year, as investors were concerned that a fiscal crisis is on the horizon and more negative news came out of Europe. Greece passed their latest austerity measures but scores of Greek citizens rioted in Athens. The ECB cut their forecasts for European economic growth in 2012 and 2013 and said not even Germany is immune to a slowdown. There was a lot of technical damage on the charts. The benchmark S&P 500, tech-heavy Nasdaq composite, and the DJIA sliced below their respective 200 DMA lines for the first time since the June low.

Thursday-Friday’s Action: Stocks Continue To Fall

Stocks ended lower on Thursday after investors dismissed the latest round of economic and earnings data. Before Thursday’s open, the Labor Department said weekly jobless claims fell to 355k which was below the Street’s estimate of 370k. Meanwhile, the trade deficit narrowed to $41.5B in September after a downwardly revised August reading of $43.8B. Economists thought the deficit would be $45.4B. The benchmark S&P 500 sliced below its 200 DMA line on Thursday which is not a healthy event. Stocks were quiet on Friday as the sellers continued dumping stocks as concerns flared regarding the EU debt crisis, the US fiscal cliff, lackluster earnings and deteriorating technical conditions.

Market Outlook- Correction:

From our perspective, the market is in a clear correction and the trend is down as long as the major averages continue trading below their respective 50 DMA lines and their 2-month downward trendline. We will turn more bullish once the major averages trade back above their respective 50 DMA lines. As always, keep your losses small and never argue with the tape.

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Adam Sarhan

Host Of The #SmartMoneyCircle Podcast, Founder and CEO of 50 Park Investments. Adam provides weekly market updates to ChartYourTrade.com readers. He is a FORBES Contributor and is a frequent guest on all the major financial media outlets.

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