To many traders, the Dow’s third straight triple-digit drop Friday was a splash of cold water. After a long rally that began last March, the three-day selloff suggests buying interest could be waning.
Of course, no recovery is without its stumbles, but this drop was the Dow’s largest since October. Now, the question is whether the market is in the midst of a significant correction or just another blip?
Here are five signs Wall Street veterans will be watching to assess whether the market has further to fall.
In the near term, traders can look to earnings reports from Apple (AAPL), Yahoo (YHOO), Texas Instruments (TXN), AK Steel (AKS), U.S. Steel (X), and Caterpillar (CAT). Investors will have an eye on Apple for signs of consumer spending, and on Texas Instruments for more indications of the semiconductor space. The industrial names will provide another view of how the stimulus is working, says Anu Sharma, managing director of the Nasdaq market intelligence desk.
“We’re already seeing great numbers, but misses will have more of an effect than positive surprises,” he says.
The latest batch of earnings reports have not been as bad as the market’s reaction. “If you strip away all the headline risk, I think earnings are actually behaving themselves pretty well,” says Jack Ablin, chief investment officer at Harris Private Bank.
So why haven’t reports inspired much buying? It could be because of what’s priced in. Consider earnings growth in tech is expected to exceed 200% for the fiscal year 2010, and the financial services sector is expected to show growth of more than 100%, Sharma says. Last year’s nadir makes comparisons easier, but the new expectations will not be easily met, he adds.
There are a couple of key barometers of sentiment worth watching starting Monday.
First, traders can look at support levels. In the week beginning Jan. 19, the Dow fell below its 50-day moving average for the first time since July 2009, raising the eyebrows of technical strategists. One sign of a larger correction at hand will be whether the averages fall through the next technical support levels.
The next support level benchmarks for the three major indexes are about 2% lower than their prior levels -- 10100 for the Dow, 1082 for the S&P 500 and 2100 for the Nasdaq. If the averages break though those, the next support levels lie about 8% lower, says Sharma.
Traders should also keep an eye on volume. Volumes are light on the way up, but will be heavy in a correction. If one is underway, Sharma says he wouldn’t be surprised to see the Nasdaq running at 2.5 billion shares a day – a rate at which movements can snowball. High volume means panic and that people are willing to take their profits, he says.
Trackback URL for this story: http://www.smartmoney.com/tb/Jdmm.2BtE.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
The Correction We've Been Waiting For? http://bit.ly/4tFelh
The Correction We've Been Waiting For?: The Correction We've Been Waiting For? Smartmoney.com - 2 hours ago To m... http://bit.ly/7FHgHB
The Correction We've Been Waiting For?: The Correction We've Been Waiting For? Smartmoney.com - 34 minutes ago T... http://bit.ly/7FHgHB
Read Full Article »