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Thursday, April 4, 2013

Attention Traders: Time to Get Defensive

The near-term market outlook has suddenly taken an ominous turn

The economic report that caused the most negative reaction was the Institute for Supply Management’s U.S. non-manufacturing study that slipped to its lowest level since August. It was followed by a disappointing March job growth number issued by ADP and Moody’s Analytics, which showed an increase in jobs of just 158,000 where 192,000 were expected.
Adding to the economic concerns, an early morning report from North Korea said that their army had been given the go-ahead to use nuclear weapons. That was later dismissed by U.S. officials as “mere saber-rattling.” However, the Pentagon said that it was increasing its missile-defense systems deployed in the Pacific.
At Wednesday’s close, the Dow Jones Industrial Average was off 112 points at 14,550, the S&P 500 fell 17 points to 1,554, and the Nasdaq was off 36 points at 3,219. The NYSE traded 812 million shares and the Nasdaq crossed 464 million. Decliners outpaced advancers on both major exchanges by 3.3-to-1.

Trade of the Day Chart Key
The Nasdaq’s intermediate 20-day moving average and the support (now resistance) line at 3,260 were taken out Wednesday by a sharp sell-off, which was especially cruel to the small-cap and midcap stocks.
The next “line in the sand” is at 3,197, which marks September’s high. This line intersects with the index’s intermediate trendline and 50-day moving average. The combined significance of intersecting support features can’t be overstated. On Tuesday, the MACD internal indicator issued a sell signal.
The Dow Jones Transportation Average, the leading index for the past five months, broke its intermediate trendline and 50-day moving average. The break, like that of the other indices, was accompanied by a sell signal from MACD.
Conclusion: The near-term outlook has suddenly taken an ominous turn. In the previous Daily Market Outlook, I noted the weakness in the Russell 2000 small-cap index and the S&P 400 midcap index. On Wednesday, that weakness was followed by a breakdown of near-term support in the important Dow Jones Transportation Average.
Now the entire broad market is on the defensive. This will be greeted as good news by long-term investors who have been patiently waiting for a correction. These are the folks who should focus on stocks at the precise prices that they are willing to pay.
Traders, on the other hand, should cover their volatile long positions and take to the short side of the market. They love a volatile market, and it looks like April will swing nicely for them whether they are bulls or bears. ...
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