Sell-off changes market's technical picture

The intermediate-term bullish trend is now questionable.

By InvestorPlace Oct 22, 2012 10:01AM

CorbisBy Sam Collins

Friday's market was hammered by sellers who focused mainly on the technology sector. It was the 25th anniversary of Black Monday, and stockholders celebrated it with the worst day for stocks in three months.

Despite the fact that third quarter earnings have been projected to be lower than the second quarter for months, the lower earnings from Advanced Micro Devices (AMD) and General Electric (GE), and a lowered estimate by Marvel Technology (MRVL), seemed to catch the market by surprise. GE noted, however, that the company is performing well and is on track to have a double-digit earnings increase for full year 2012.

Nevertheless, the Dow Jones Industrial Average fell 205 points to 13,344, the S&P 500 lost 24 points at 1,433, and the Nasdaq fell 67 points to 3,006. The NYSE traded 1.3 billion shares and the Nasdaq crossed 601 million shares. Decliners outnumbered advancers on the Big Board and Nasdaq by almost 4-to-1. For the week, the Dow was up 0.1%, the S&P 500 gained 0.3%, and the Nasdaq fell 1.3%.

Nasdaq Chart
Click to Enlarge

Trade of the Day Chart Key

Friday's sell-off was focused on high price-to-earnings ratio tech stocks. Since they make up about 30% of the Nasdaq, we expected lower prices from the Nasdaq and we got just that. But the fact that the Nasdaq has broken near-term support and ended on Friday just 5 points from its head-and-shoulders target at 3,000, means that it is in divergence with the other major indices.

Dow Chart

Click to Enlarge

Friday's sell-off resulted in a slight penetration of support at the Dow's 50-day moving average. That alone isn't serious, but a close under the support line at 13,275 could cause trouble, since it would agree with Nasdaq's breakdown and confirm that the intermediate-term direction was in jeopardy. And the MACD indicator has turned down instead of moving up as it appeared to be doing on Thursday.


Friday's sell-off changed the technical picture from intermediate-term bullish to questionable. Third quarter earnings have not been good, but this should have been anticipated. The other key variables, chiefly the election, the European debt situation, and weakness in China, are factors that could have a negative impact on the markets. For now, we should stand aside and let the market tell us its next direction. There is a time to sell and a time to buy. But this is a time to wait.

More from InvestorPlace

Oct 22, 2012 10:24AM
Smart Money has left the House=Black Monday= TAKE YOUR MONEY AND RUN  !!
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