3 reasons to resist panic selling

Global markets reacted to the mixed message from the Fed by selling. But there is indication of another rally phase ahead.

By MoneyShow.com May 23, 2013 12:30PM

Stock market (© Digital Vision/SuperStock)By Tom Aspray

Wednesday was one of the widest-ranging days since the middle of April, with a 277-point range in the Dow Jones Industrial Average ($INDU) and 41 points in the S&P 500 ($INX) as traders reacted to mixed messages from the Federal Reserve. The overnight selling in Asia was exacerbated by a drop in preliminary readings on Chinese manufacturing.

The European markets were also down sharply with the German DAX Index down 2.6% in early trading and the Dow opening sharply lower.

Several of the major averages formed what is known as key reversals in Wednesday's trading. This chart shows the NYSE Composite Index ($NYA), which opened Wednesday at 9605, above the prior day's close at 9598. NYA made a significant new high early in the day at 9695, then closed at 9508, which was well below Tuesday's low at 9556.


The weakness in the asset management stocks after Tuesday’s close looks to have been an advance warning of Wednesday's drop (see MoneyShow). Does this mean investors should be selling their stocks?

Click to Enlarge

Chart Analysis: The NYSE Composite tested its daily starc+ band Wednesday before reversing to the downside as noted above.

  • The 20-day EMA is at 9411 and is likely to be exceeded early Thursday.
  • There is more important support at 9265, which corresponds to the April highs, line a.
  • This is 2.5% below Wednesday’s close, and it is the likely first downside target.
  • The 38.2% retracement support from the November 2011 low is at 8984, which corresponds to the support at line b.
  • The NYSE Advance/Decline line confirmed the recent highs before it turned lower.
  • The rising 21 WMA is now being tested with further support at the uptrend, line d.
  • There is more important support for the A/D line at line c.

The Spyder Trust (SPY) also formed a key reversal on Wednesday and volume was double the daily average.

  • The daily starc- band and the 20-day EMA are now at $163.28.
  • The April highs at $159.80 (line e) represent more important support. It is 3.6% below Wednesday’s close.
  • The uptrend (line f) and the 38.2% Fibonacci support is now in the $155.94 area.
  • The major support is at $153.55, which was the April low.
  • The daily OBV confirmed the recent highs and is now testing its WMA.
  • There is next support for the OBV at line g.
  • The S&P 500 A/D line also confirmed the recent highs and is still holding above its WMA.
  • The uptrend in the A/D line (line i) and more important support are considerably below current levels.

Click to Enlarge

The Powershares QQQ Trust (QQQ) also formed a key reversal on Wednesday and closed below Monday’s low at $73.89, so an LCD was also triggered.

  • QQQ is still well above the 20-day EMA at $72.52.
  • There is more important support at the September high of $70.52, line a, which is just over 4% below current levels.
  • The 38.2% Fibonacci support is at $69.72 with the 50% at $68.11 along with the uptrend, line b.
  • The Nasdaq 100 A/D line has confirmed the recent highs but turned lower Wednesday.
  • There is further support for the A/D line at the April highs with long-term support at line c.
  • There is resistance now in the $74-$74.95 area.

The iShares Russell 2000 Index (IWM) had a new all-time high at $100.38 before closing at $97.78.

  • The daily chart completed its flag formation, lines d and e, in early May.
  • The 161.8% retracement target at $99.07 was exceeded on Monday.
  • There is next important support in the $95.10 area and the 38.2% retracement support (not shown) from the November lows is at $91.06.
  • The daily OBV tested the recent highs, line f, but did not confirm the new price highs.
  • There is key OBV support now at the uptrend, line g.
  • The Russell 2000 A/D line did make new highs this week and is still above its WMA.
  • The A/D line now has more important support at line h.

What it Means: The confirmation of the new price highs by the weekly and daily NYSE A/D are two solid reasons why you should avoid panic selling. They indicate that after correcting further there should be another rally phase before a significant top could be completed.

The confirmation of the new highs by both the weekly and daily OBV on the Spyder Trust (SPY) and the fact that they have not yet broken important support is another reason not to panic. This indicates that more time is required before significant sell signals could be generated. Both the OBV and A/D lines generally lead prices as was the case last December.

The SPY has a minor target at $163.28 and should hold above the support in the $159.80-$162 area before it rebounds. The iShares Russell 2000 Index (IWM) does look more vulnerable.

I would not chase the inverse ETFs at these levels as they are likely to open much higher, but if a top is confirmed, there will be a better risk/reward entry at a later time. Be sure you have your stops in place and avoid any panic selling.

How to Profit: No new recommendation.

More from MoneyShow.com

May 23, 2013 1:04PM
Sounds good and in normal times you may be right, but these times are not normal. This is not going to end well. I am not panic selling but I am selling. The fed needs to stop manipulating the markets. It's going to be painful and it's going to cause another recession, but the longer they wait, the more pain and deeper recession is what we will be in for. They need to learn to let the markets and economy heal itself.
May 23, 2013 1:08PM
Let the big boys eat it this time. The fed is telling you where it is heading why can't you get the massage? Our government is not there for the American people, it is there for corporate America. TARP saved investment banking at the expense of the American people. When do we learn???
May 23, 2013 1:53PM

Technical analysis of equities, and astrology: So many charts with lines and points and connectors.


So little meaningful, specific, or timely correspondence to the world's future outcomes and events.

May 23, 2013 1:17PM
Nope.  I am out today.  Maybe I will miss the peak, but I rode up most of the hill.  Good enough.
May 23, 2013 1:47PM
Sell in May and go play with the profits.
May 23, 2013 4:03PM
Reason #1, So the large institutions who artificially inflated stock prices can sell them before you do.
May 23, 2013 2:10PM
Candlesticks, haven't noticed that as a reference, lately. Bottom line with any technical analysis, results are based sometimes more on reaction of what charts say as opposed to what's actually going on in the World. I doubt charts/candlesticks have ever had to account for so many variables like Global Feds gone Mad and China data in a Deep Black Hole of Unknowns. I doubt that they can.

Resist panic Buying, then you don't have to worry as much about panic selling. Take profits when you have them, then you don't have to worry about how much the Markets may or may not fall.

May 23, 2013 2:32PM
Reason #4:  Don't sell right away so that the smart money can get out first!!!
May 23, 2013 4:40PM
Until someone in congress explains what is going on with the debit limit, panic will ensue.  Evidently congress suspended the debit  limit on April 17th.  The foreign press got hold of this information (it has not been reported in any US publication that I can find) about noon EDT on Monday and the markets started to decline. Congressman Boehner published letters on the Department of the Treasury letterhead first stating that this was a irresponsible act (on the 17th) and then that government pension and postal pension payments could not be made (on the 20th).  Reports are that $300 billion in debit has been issued in excess of the $17.3 trillion debit ceiling.  These report coincide to the hour with the mass withdraw of foreign funds from US equity markets.  Now put down your fancy charts and PLEASE EXPLAIN WTF is going on!
May 23, 2013 2:24PM

The market has always been "Full of Dung" so go buy some cheap wine and forget the "Wall Street Blues!" for the rest of the day!! .. And remember this, "No Salt Salts Like An Old Salt Salts"

The Old Salt.

May 23, 2013 4:55PM
That last candle there on the NYSE composite looks like a bearish engulfing pattern, time will tell, but I'd be thinking of an exit plan at best or some type of strategy to hold on to my gains and try to minimalize losses.
May 23, 2013 4:00PM
Panic selling?  Seriously, modern financial media attitudes belong in insane asylums.  If this isn't One Flew Over the Cuckoo's Nest, I don't know what is.  Stocks could drop 5% and most investors would still be infected with smilitis over their good fortune this year.

Panic selling?  Yeah, I want to get hit with capital gains taxes while not knowing when to get back in the market.

What could induce writers and editors to feed us this swill?  Do they have an agreement with brokerages to try to get us to churn accounts?  Please, MSN, give us another explanation.

May 23, 2013 4:16PM
If you stand on you head when reading these charts you will get the same results. All a bunch of maybe's ; if's and ??????.
May 23, 2013 5:43PM
I think it's Casino time, use up some free play...Get a free sandwich, that ends up costing $100.
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