8 reasons the selloff could get much worse
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.
– Barbara Kollmeyer
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