Week In Review: Stocks Negatively Reverse And Close Below 200 DMA lines

Friday, June 25, 2010
Stock Market Commentary:

The major averages negatively reversed (opened higher and closed lower) this week after encountering resistance near their respective 50 DMA lines. The current rally is under pressure after the major averages fell back below their respective 200 DMA lines and suffered a series of ominous distribution days. On Friday, volume totals were reported higher on the NYSE and the Nasdaq exchange compared to Thursday’s levels due to the rebalancing in the small cap Russell 2000 index. Advancers trumped decliners by more than a 2-to-1 on the NYSE and on the Nasdaq exchange. There were only high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher than the issues that appeared on the prior session. Leadership has evaporated, and without a healthy crop of leaders hitting new highs it is hard for the major averages to sustain a rally. New 52-week highs outnumbered new 52-week lows on the NYSE but trailed on the Nasdaq exchange.

Monday & Tuesday’s Action- Stocks Encounter Resistance At 50 DMA line:

Stocks opened sharply higher on Monday but closed lower after The People’s Bank of China pledged on June 19 to make the yuan more flexible. The major averages negatively reversed after encountering resistance near their respective 50 DMA lines and spent the week pulling back. On Tuesday, both the Dow Jones Industrial Average and the benchmark S&P 500 Index close below their respective 200 DMA lines only one week after the latest follow-through day (FTD) confirmed a new rally. In our view, this put the latest rally under pressure and suggested lower prices may likely follow. The selling accelerated after the National Association of Realtors said sales of previously owned homes fell -2.2% last month and the euro fell for a second consecutive day.

Wednesday-Friday’s Action: Tepid Economic Data Drags Stocks Lower

The selling continued on Wednesday as investors digested dismal housing data and the Fed left rates unchanged as the economy continues to recover from the worst financial crisis since the Great Depression. The Commerce Department said purchases of new homes plunged nearly -33% to an annual pace of300,000 last month as the government’s tax credit expired. The report also showed that the median home price slid to just over $200,000 and prior months readings were downwardly revised. The overtly weak reading left many to question the health of the already fragile economic recovery. In addition, anyone watching housing stocks in recent weeks should now expect dismal news (possibly a double dip in the ailing housing market) to continue in the near future.

On Thursday, stocks fell in heavy trade sending the Nasdaq composite and small cap Russell 2000 index below their respective 200 DMA lines which bodes poorly for the latest rally attempt. Before Thursday’s opening bell, two separate government reports dragged stocks lower: unemployment claims fell from a two-month high while durable-goods orders fell -1.1%. Stocks closed modestly higher on Friday after the much anticipated financial regulatory (FinReg) bill is getting close to passing.

Market Action- Rally Under Pressure:

Technically, the fact that the Dow Jones Industrial Average, S&P 500, Nasdaq composite, and Russell 2000 index all closed below their respective 200-day moving average (DMA) lines this week bodes poorly for the last rally attempt. Additionally, several major averages are currently tracing out a rather large head-and-shoulders top formation (shown above) which is not a healthy sign. Interestingly, the neckline of this bearish pattern is this month’s lows. Looking forward, the 50 DMA line may act as stubborn resistance and this month’s lows should act as support. Since the June 15, 2010 follow-through day (FTD), this column has steadily noted the importance of remaining very selective and disciplined because all of the major averages are still trading below their downward sloping 50-day moving average (DMA) lines. This week’s sell-off simply confirms that view. Trade accordingly.

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