How Concerned Should Traders be About the Market’s Reversal?

After plugging away to a new intraday high, headlines drove the S&P 500 to a negative close

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Mar.26, free stock tips .- Shortly after a strong opening that brought the S&P 500 to within 1 point of its all-time high, comments from European bank regulators were interpreted negatively. An afternoon clarification resulted in a rally that took back almost half of the earlier losses, but the major indices closed lower.

The early comments led investors to believe that the Cyprus settlement could be used “as a template for dealing with future problems.” A later restatement of policy indicated that the regulators consider Cyprus “a unique case,” but much damage had been done, especially to Italian markets as demand shifted to the safer havens of Germany and the U.S. bond market.

At the close, the Dow Jones Industrial Average lost 64 points at 14,448, the S&P 500 fell 5 points to 1,552, and the Nasdaq dropped 10 points to 3,235. The NYSE traded 655 million shares and the Nasdaq crossed 393 million. Decliners outpaced advancers on the Big Board by 1.5-to-1 and on the Nasdaq by 1.1-to-1.

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After plugging away to a new intraday high at 1,565, headlines drove the S&P 500 to a negative close and a reversal. The internal indicator, MACD, flashed a sell signal supporting the negative close.

Support rests initially at 1,542, the 20-day moving average. But the number that must remain firm is the major support line at 1,531, the February high.

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The Dow industrials suffered a similar reversal. But unlike the S&P 500, the Dow made another all-time high before succumbing to a minus day and a reversal.

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The Dow transports continued the short-term downtrend begun six sessions ago. It broke its initial support at 6,170 on Monday, but managed to close above its 20-day moving average at 6,131. The next major support is at 6,031.

Conclusion: It would have been nice to have a clean breakout with the S&P 500 soaring to new highs. But European headlines intervened, and some of the old fears were rekindled.

The good news from Monday is that each index suffered a simple reversal that could result in a minor pullback. A key reversal day with a close below Friday’s low would have been much worse.

In a shortened week (markets are closed on Good Friday), volume usually declines, and so the chances of a full blown sell-off are slim. As usual, we will be on the lookout for outstanding buys, but you had better put in a buy limit order if you expect to nab your favorite bargain. There is still a lot of money chasing quality stocks.

The technology sector appears to offer the best possibility for new purchases. Note that Apple(NASDAQ:AAPL) and SanDisk (NASDAQ:SNDK) posted gains Monday, and Micron Technology(NASDAQ:MU) was down a fraction. (See my Trade of the Day.)