Think Twice Before Going Bargain Hunting

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Stocks took it on the chin yesterday when European leaders’ plans to solve the Greek debt problem went awry. Greece’s Prime Minister George Papandreou called for a referendum on the European Union’s plan, creating uncertainty and resulting in a general sell-off on the world’s markets.

After the best October for the S&P 500 in 37 years, stocks were at levels that could only be supported by the strongest of fundamentals. The 11% gain ended with almost 95% of the stocks in the index above their 200-day moving averages. After such an overdone rush to buy, everything must go right in order to keep the bull moving.

But instead the news from Greece sent the Dow Jones Industrial Average down 2.48%, the S&P 500 off 2.79%, and the Nasdaq down 2.89%. The NYSE traded 1.3 billion shares, and the Nasdaq traded 671 million, which is above the 30-day average volume. Decliners were ahead of advancers by over 6-to-1 on the Big Board and 5-to-1 on the Nasdaq.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

The possibility of a rejection of the Greek plan by a public referendum was an unexpected turn of events, and stocks plunged through major support levels. The 200-day moving average held for just one day (Friday) and was crushed on Monday. Tuesday opened on a huge gap down, and by the close the index had violated the important support band at 1,225 to 1,230 and 33.3% of the retracement of the October advance at 1,220, a Fibonacci number.

The next important Fibonacci number is 1,209 (38.2%), a number that could be termed a “crash” number instead of a “normal pullback” number. It is not often that major indices turn and plunge through major support lines and zones in two days.  But when it happens, traders who have been around the markets for a long time relate them to prior crashes.

In addition to the S&P 500’s fall from grace, the Nasdaq threatens its major support line at 2,600, and the Dow at 11,658 hovers just above a major breakdown point at 11,650. And on each chart our internal indicators have flashed warnings of a major meltdown. Note that MACD on the S&P 500’s chart is close to a sell signal with the fast line (red) curling down toward the slow line (blue). Other indices are flashing similar warnings with the stochastic issuing a clear “sell” signal.

Conclusion: The stock market has been unusually sensitive to news for three months, and volatility has risen along with it. The CBOE Volatility Index (VIX) rose 4.81 yesterday closing at 34.77, which portends more of the same price action. The two-day collapse of the major indices should warn those who are thinking of bargain hunting to refrain unless they are prepared to sustain major losses.

Rallies should be used to unload stocks, while traders should play the short side of the market for a test of the low at S&P 1,100 while protecting their position with stop-loss orders. (For specific bear market trades, click here.)

Volatility works both ways, and a positive announcement from Europe could reverse the entire picture. For now, however, the bear prowls the corner of Wall and Broad streets.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

SlingShot Trader


Article printed from InvestorPlace Media, https://investorplace.com/2011/11/daily-stock-market-newsthink-twice-before-bargain-hunting-now/.

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