Key Nasdaq reversal signals a cooling-off phase for near term
Marketwatch - October 16, 2007 11:40 AM ET
CINCINNATI (MarketWatch) -- After a bearish conclusion to last week, the U.S. markets extended their negative tone into Monday.
Specifically, the Dow industrials dropped 108 points, the Nasdaq lost 25 points, and the S&P 500 gave back 13 points.
Yet while prospects of further near-term losses have strengthened, the more important longer-term trend remains higher.
The S&P 500's hourly chart above serves as a detailed view of the past three weeks.
Since violating its uptrend last Thursday, the S&P has found resistance near its former trendline.
Upon stalling in that area, it's broken under former support at 1,550 and subsequently observed that area as resistance.
All told, the chart above signals the potential for a near-term pullback.
Meanwhile, the Dow industrials have also pulled in from all-time highs.
In Monday's action, the blue-chip barometer staged a shaky test of support at 13,950, ending the session at 13,984.
On further weakness, minor support holds around 13,860 followed by a more important floor at 13,700, a level matching the June and August highs.
As for the Nasdaq, its near-term view resembles that of the S&P.
Recall the Nasdaq sold off severely on Thursday, posting a massive intraday reversal of 77 points, or 2.7%.
On the subsequent lift, it stalled Monday at 2,811, a level marking its six-year closing high.
And with Monday's 25-point sell-off, the Nasdaq edged under its three-week uptrend -- also signaling a potential near-term pullback.
Widening the view to the daily time frame adds perspective to the Nasdaq's price action.
Late last week, the index formed a rare candlestick pattern known as a key reversal. (More on this bearish formation in the "bigger picture" section, further down the page.)
From current levels, first support holds at the top of the October gap, around 2,750, followed by a more significant floor at the July peak of 2,724.
Yet while the Nasdaq's chart has taken a disturbing turn, the Dow industrials remain on firmer footing: Its recent weakness looks like a garden-variety pullback from all-time highs.
From Monday's close of 13,984, first support holds at 13,950 followed by a firmer floor around 13,700.
As for the S&P 500, it edged back under the July high on Monday.
Upon violating that level, it bottomed intraday at 1,540 -- matching support -- before lifting to close at 1,548.
That means that as with the Dow, the S&P's pullback looks like healthy consolidation.
The bigger picture
The Nasdaq's sudden relative weakness remains the biggest technical issue facing the U.S. markets.
In that vein, the chart below is a repeat of the Nasdaq's daily chart, detailing its bearish price action last week.
As the chart illustrates, the Nasdaq staged a key reversal last Thursday -- a reliable, and relatively rare, pattern that's distinctly near-term bearish. Its elements fall out as follows:
The open (2,824) comes in above the prior day's close (2,811).
The day makes a new high (2,834).
The close (2,772) comes in under the prior day's low (2,796).
As a rule, the stronger the previous trend is, the more reliable the signal.
In this case, the Nasdaq's pattern was unusually large -- 77 points from top to bottom -- and was preceded by a steep uptrend from the August low: Both signs, in other words, of a potential trend shift.
So with the U.S. markets coming off a 10% rally spanning two months, a cooling-off period wouldn't be surprising.
And looking toward a potential pullback, the following areas mark good candidates for support:
Nasdaq support at 2,750, marking the top of the October gap, followed by the 2,724 July peak.
S&P support at 1,540, marking the June high, followed by the late-September low of 1,507.
Dow support initially at 13,950, followed by a more significant floor at 13,700, matching the June and August highs.
With the U.S. markets holding a strong primary uptrend, each benchmark should find buyers in those areas. This is particularly so for the lower of the two support points.
Yet setting aside a near-term pullback, the more important longer-term trend remains higher.
As recently as last week, the S&P 500 and the Dow industrials both notched all-time highs, concluding a technically impressive rally from the August lows.
Tuesday's watch list
The charts below highlight names well positioned technically. These are intended as radar-screen names -- sectors or stocks positioned to move in the near term. For the original comments on the stocks below, check out The Technical Indicator Library.
Index Symbol Mon Close Support Resistance Integrated Oil Index XOI 1,495 1,470 1,515
With crude-oil prices hitting $87 a barrel, the Integrated Oil Index $XOI is pushing the envelope on record territory.
As the chart illustrates, the group rallied sharply from the August lows, before staging a shallow pullback in late September.
Upon holding the 1,400 level, the group resumed its uptrend, closing Monday just 15 points, or 1.0%, under all-time highs.
Its already-favorable backdrop would further strengthen on a decisive break atop the July peak.
The four charts below illustrate sector components positioned to rise: Exxon Mobil (XOM), Anadarko Petroleum (APC), Hess Corp. (HES) and Valero Energy (VLO).
(It's worth noting that elsewhere in the energy sector, the Oil Services Index $OSX, profiled two weeks ago, and the Natural Gas Index $XNG, profiled last week, are outpacing the Integrated Oil Index, with both groups recently staging decisive breaks to record territory.)
Company Symbol Mon Close Support Resistance Crocs Inc. CROX $70.30 $68.00 New High
Initially profiled Aug. 21, and revisited Sept. 25, Crocs Inc. (CROX) has returned 25.2% and remains well positioned.
In Monday's action, it edged to all-time highs despite a down market.
The rally came on strong volume, improving the chances of a sustainable breakout.
Company Symbol Mon Close Support Resistance CME Group CME $622.69 $605.00 $634.00
CME Group (CME) is a large-cap financial-exchange operator positioned to rise.
Earlier this month, it broke sharply to record territory, clearing resistance at the January and August highs.
Since then, it's established a tight range near all-time highs, suggesting that despite recent gains, sellers remain conspicuously absent.
Company Symbol Mon Close Support Resistance Ciena Corp. CIEN $44.59 $43.80 $48.40
Ciena Corp. (CIEN) is a mid-cap networker positioned to rise.
Earlier this month, it spiked to three-year highs after the company hosted a well-received analyst meeting.
The subsequent pullback has come on lighter volume, placing Ciena's shares at a better entry near support, and 8.5% under their October peak.
Company Symbol Mon Close Support Resistance Emerson EMR $52.98 $52.00 $55.30
Emerson (EMR) is a large-cap maker of industrial electrical products.
Late last month, it spiked to all-time highs on an analyst upgrade.
Since then, it's sustained the breakout, pulling in this week to a better entry near support.
Company Symbol Mon Close Support Resistance Natco Group NTG $56.60 $55.80 $60.40
Natco Group (NTG) is a mid-cap oil-services name positioned to rise.
After recently holding a tight three-week range, it spiked to all-time highs last week.
By comparison, its recent pullback has come on lighter volume, placing the shares at a better entry near support, and 6.7% under their October peak.
Company Symbol Mon Close Support Resistance Qiao Xing Mobile Communication XING $11.86 $11.50 $13.40
Qiao Xing Mobile Communication Co. (XING) is a China-based telecom name positioned to rise.
Over the past month, it's staged two strong volume rallies -- a mid-October break atop its downtrend, and last week's extension higher.
By comparison, the intervening consolidation came on lighter volume, confirming its new uptrend.
From current levels, first support holds at the top of last week's gap, around the $11.50 mark. At Monday's close, Qiao Xing held 68% under the February peak.
Still well positioned
