Sam Collins, InvestorPlace Chief Technical Analyst
New York, Oct.25, trading stocks .- Stocks started Wednesday on a positive note following news that new homes sales rose to the highest level in more than two years, increasing 5.7% in September versus August. But an afternoon statement by the Federal Open Market Committee said that it saw “significant downside risk” to the economy and would keep interest rates low through mid-2015. It added that it will continue to buy $40 billion of mortgage-backed securities a month.
The early gains were quickly erased on the Fed announcement, and the Dow Jones Industrial Average closed at 13,077, down 25 points. The S&P 500 lost 4 points at 1,409, and the Nasdaq fell 9 points to 2,982. The NYSE traded 649 million shares, and the Nasdaq crossed 460 million. Decliners outnumbered advancers on both exchanges by 1.2-to-1.
After hitting an all-time high just over a month ago, the small-cap Russell 2000 fell like all of the other indices. But so far, it’s been a modest correction, down just 6.3% from the top.
Like the Nasdaq, which we covered yesterday, the index is oversold and due for a bounce. And the first resistance to a rally is at the 50-day moving average, now at 832. But after that bounce look for another downturn.
Remember corrections can get a lot worse, even up to 12%, without disturbing the major bull trend. Using the Fibonacci numbers, a 50% pullback of the May-to-September high works out to about 800, and a full 61.8% pullback would take the index to 783, a 10.5% correction.
Conclusion: All of the indices are oversold and due for a bounce. My advice is to not chase the bounce since an average correction following a new high might reach 8%-10%, and even 12% is not unusual.
And with the uncertainty of the election, the fiscal cliff, and numerous global issues, this is no time for investors to chase stocks. It takes discipline to make money, and waiting is the hardest thing for investors and traders alike to do.
The bull is sleeping, but sometime in November, I expect him to awake and make another run at the September highs.
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