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Adam Sarhan MarketWatch.com Quote: 8 reasons the selloff could get much worse

Market Watch

8 reasons the selloff could get much worse

November 8, 2012, 11:22 AM

As if investors don’t have enough to worry about with the fiscal cliff, scary technical indicators are coming out of the closet.

Adam Sarhan, founder and chief executive officer of New York-based Sarhan Capital, said that over the past eight weeks, U.S. stock markets undercut their 50-day moving average lines, which marked support for most of the summer, and are now serving as resistance to any gains.

“And now the major averages are testing their 200-day moving average lines which are currently serving as support,” he said. A couple of major indexes broke those support levels on Wednesday, and that could open up the way for more selling, he warned.

Moving averages offer average closing prices for a stock or index over a defined period of days, helping traders identify trends.

Among the 200-day moving averages to watch:

  • 12,991 for the Dow Jones Industrial Average  DJIA -0.31% , which was broken Wednesday.
  • 1,380 for the S&P 500  SPX -0.37%, which is still holding.
  • 2,982  for the Nasdaq Composite  NDAQ +0.29% , also broken Wednesday.

Sarhan said a key question for now is whether the current pullback — so far a relatively mild one — gets worse and enters correction territory, typically defined by a decline of more than 10% from a recent high.

He identifies dangers for the market that could trigger more selling:

  • Continuing technical deterioration for heavy-hitting stocks like Apple Inc.  AAPL -1.50%, which he said broke its 200-DMA last week ;
  • A European debt-crisis flare up;
  • Signs of U.S. economy or global economic slowdown;
  • A new Chinese government that isn’t so friendly to the U.S. (Read: China’s leadership transition raises questions);
  • And last but not least, the U.S. going over the fiscal cliff.

“Bottom line: Investors want to know what catalyst (s) will help the market rally from here,” Sarhan said.

Read: Will yesterday’s big decline be reversed?

– Barbara Kollmeyer

Follow The Tell blog on Twitter @thetellblog

Follow Barbara on @MWBarbaraKollmeyer

URL: http://blogs.marketwatch.com/thetell/2012/11/08/8-reasons-the-selloff-could-get-much-worse/