10/24/12
The Dow was rocked for 200+ points for the second time in three days. This one did technical damage to two charts that had been holding up. Stocks are now oversold, so now what?
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The S&P 500 dropped below the 50-day EMA and the key 1425-1430 area and this is a problem. Sure, we could see a relief rally, but if you are a follower of technical analysis, this isn't pretty.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Not surprisingly, two 200+ point drops in three days sent the NYSE into oversold territory, but not yet to an extreme reading. Going back to the June lows, the last few times that the NYSE was this oversold (currently -273) we saw a snap back rally. So the next few days will be a test to see if this rally is simply going to resume after this recent pullback, like we saw after the prior oversold readings.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
There are some interesting / positive developments: For one thing, the market leading Dow Transportation Index, which went into Tuesday testing the 200-day EMA, rallied nearly 1% while the Dow and S&P were being rocked.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
And the Russell 2000 put in a positive reversal day - the second one in two days. Positive reversal days tend to continue in the direction of the reversal the next day or so that is the good news. The bad news is that the Russell could be hitting overhead resistance right here, after breaking down below the recent support.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
It may be oversold enough to push back up to test the 50-day EMA, but if the rally that started in June is really over, the 50-day EMA may prove to be troublesome to regain.
There is an FOMC meeting today and there could be some fireworks. It seems like the Fed has a way of stopping the bleeding when the market is in trouble. Today they have another chance to do so.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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