Skip to main content

Serious break on the charts? How worried should you be?

Stocks started another week with a very strong Monday performance. Friday's shortened session, however,  was long enough to more than erase the earlier gains of many stocks and ETFs.

Talk of "sovereign default" related to the Dubai World request for a debt "standstill" overcame most other news that had transpired during the course of the week. As a result, charts suddenly appear to have broken down.

Below is the chart of the S&P 500. That big red bar representing Friday's action is clearly visible and it certainly looks like a dangerous downdraft, signalling more pain ahead.

But is this really a serious break? Was Friday's volume so low just because it was an abbreviated session? Or wasn't there much conviction to the sell-off? What do the Alert HQ statistics suggest?

The view from Alert HQ --

Charts of some of the statistics we track at Alert HQ are presented below:

This first chart presents our moving average analysis. The chart shows that roughly half of the stocks and ETFs we track are still above their 50-day MA. Not shown on the chart is that less than 40% are above their 20-DMA. As shown by the magenta line, the number of stocks whose 20-DMA is above their 50-DMA is slowly dwindling but is still above 57% which is not too bad. Despite the sell-off at the end of the week, data on this chart suggests that stocks are holding their own and may not have much further to fall.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

A notable feature of today's chart is that the number of stocks in up-trends actually increased this week despite the Dubai news and the Friday sell-off. In addition, the number of stocks in down-trends did not increase. Furthermore, the number of up-trends has just crossed above the number of down-trends. There is a good potential that we are seeing early signs of stocks gathering themselves for another run to new highs.

Conclusion --

Stocks had been going nowhere for the last two to three weeks. At first glance, Friday's action appears to have resolved the indecision - the new direction is now to the downside. Or is it?

Our statistics as displayed in the charts above show that stocks are still somewhat firm. The Dubai sell-off did some damage but, to truly push markets lower, we will need another catalyst. With earnings season over, we can look to economics reports to drive the markets.

Certainly, there will be plenty of data for investors to munch on. This week will bring November Construction Spending, the ISM Index, Pending Home Sales, Auto Sales, Truck Sales, ADP Employment Report, Crude Oil Inventories, the Fed Beige Book, Initial Jobless Claims, Continuing Claims, Q3 Productivity and Labor Costs, the Employment Cost Index, ISM Services Index, Nonfarm Payrolls, the Unemployment Rate, Average Workweek, Hourly Earnings and Factory Orders.

Given that the economy is improving but is not yet out of the woods, a slate of reports this large is bound to cause some volatility. This means we could indeed see more downside. But if the charts above are showing the underlying strength that I think they are, then, barring a huge disappointment in the Nonfarm Payrolls report, stocks might actually start to rebound by the end of the week.

So have the charts broken down? Yes, but not seriously. Keep in mind, the primary trend remains UP.


Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any