Stocks Negatively Reverse At 50 DMA Line

Monday, August 23, 2010
Stock Market Commentary:

The major averages negatively reversed (opened higher but closed lower) on Monday after encountering resistance near their respective 50 DMA lines. Volume reported on the NYSE and the Nasdaq exchange fell on Monday compared to Friday’s levels which was a somewhat welcoming sign. Decliners led advancers by almost a 2-to-1 ratio on the NYSE and by almost a 3-to-1 ratio on the Nasdaq exchange. New 52-week lows outnumbered new 52-week highs on the NYSE but trailed on the Nasdaq exchange. There were 25 high-ranked companies from the Leaders List made a new 52-week high and appeared on the BreakOuts Page, higher than the 9 issues that appeared on the prior session.

50 DMA line Is Resistance:

Stocks opened higher but turned lower (negatively reversed) after encountering resistance near their respective 50 DMA lines. From a technical perspective, this is not healthy action. Not only are the major averages below their respective downward sloping 50 DMA lines, their 50 DMA lines, are still below their longer term 200 DMA lines. This ominous pattern is known as a “death cross” and usually suggests lower, not higher prices, will follow. Later this week, the latest read on the ailing housing market will be released: existing home sales and new home sales. This should give investors the latest look into this troubled sector.

Market Action- Rally Under Pressure:

The technical action in the major averages continues to weaken. Currently, resistance for the the major averages are their 50 DMA lines, then their longer term 200 DMA lines. It is also disconcerting to see the action in several leading stocks remain questionable as evidenced by the dearth of high-ranked leaders breaking out of sound bases. Monday’s negatively reversal emphasizes the importance of remaining cautious until the rally is back in a confirmed uptrend. Put simply, we can expect this sideways/choppy action to continue until the market breaks out above resistance or below support (recent chart lows). The first scenario will have bullish ramifications while the second will be clearly bearish. Trade accordingly.

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