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Market Support Level Broken October 19, 2012

Posted by Tom in Thoughts.
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Hard to write very much when I don’t get much feedback . . hint: click on the Comment section at the bottom of this post and let me know what you think.   🙂

OK, an interesting week.  A few important Tech companies (Intel, Google) report “less than expected results” for earnings in the 3rd quarter but more important gave lower guidance for the 4th quarter.  Not what this market was hoping for and it showed.  (click on chart to enlarge)

Note that we solidly broke through the 3040 level on the NASDAQ.  On the chart above we also see the breaking of both the Aggressive and Conservative (drawn) trend lines.  That is followed by my notes in the lower section on volume.  Volume dried up on the last rally (lack of demand), and picked up during the current fall (selling).  I also see similar action in my proprietary “Volume Spread Analysis” indicators.

Is this the beginning of a terrible correction?  Possible, but at this point not very likely.  What we’re seeing is a shake out from weak hands into strong hands, or if you prefer, from nervous investors to stronger ones.  It’s always better to buy at wholesale and sell at retail as the saying goes.  We will watch the next week to see how both price and volume react.  That will tell us if more is to come.  For now I’ve lightened up considerably and have put on a moderate “hedge” (bought an ETF that goes up when the market falls; think of it as insurance) for protection.

Interesting to note that some stocks have held up fairly well.  Select financials, building materials and pharmaceuticals come to mind.  Let see where we are as a whole right now:

The pie chart above is of Price Strength of all stocks in the S&P 1500 Index relative to their recent price range, a very broad indicator.  45.1% are Red / weak, 29.8% are Yellow / neutral and 25.1% are Green / strong.  Yes, we see selling confirmed by greater weakness but (so far) it looks like a normal correction in the up trend.

The chart above is of Money Flow for the S&P 1500 stocks, that is a combination of price and volume; is money flowing in or out of the market.  25.3% Green / in flow, 20.0% Yellow / neutral and 54.7% Red / out flow.  Again selling is confirmed but (so far) does not show panic.

Most importantly where should we NOT be right now?  The table below shows the 10 Worst Industry Sectors as far as recent performance; not good places to be right now.

Have a good week. And keep an eye out for both people throwing in the towel and for opportunity.  (hint: where are the previous leaders and are they showing signs of strength?)     ……..  Tom  ………

price chart courtesy of MetaStock; pie chart and table of www.HighGrowthInvestor.com; used with permission.

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