The Best Way to Trade This Market

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Despite a report showing that U.S. construction spending in April had its largest gain in almost 10 years, stocks turned down again on Tuesday. The construction spending numbers, however, probably had a cushioning effect on selling, but despite that, the Dow Jones Industrial Average ( DJI ) closed with another triple-digit loss.

BP plc (NYSE: BP ) fell another 15% in reaction to its recent failure to cap the oil spill in the Gulf of Mexico. And the energy sector of the S&P 500 ( SPX ) fell 4.3%. Transocean Limited (NYSE: RIG ), the operator of the rig that caused the oil spill, fell 11.9%, while Anadarko Petroleum Corporation (NYSE: APC ) lost 19.6%, and Halliburton Company (NYSE: HAL ) lost 14.8%. 


Europe's economic worries were still on the top of stock traders' list of fears. Reinforcing that fear was an announcement by the European Central Bank ( ECB ) that some banks may face further write-downs over the next 18 months.

And concerns over weaker-than-expected manufacturing data from China caused selling of some emerging markets stocks. And while U.S. investors were pondering what to do next, the Bank of Canada announced that it added 25 basis points to its benchmark interest rate, which is now at 0.5%.

The U.S. dollar rose versus the euro, which closed at $1.21.

At the close, the Dow was down 113 to 10,024, the S&P 500 fell 19 points to 1,171, and the Nasdaq ( NASD ) lost 35 points to 2,222. 

The NYSE traded 1.4 billion shares with decliners ahead of advancers by more than 3-to-1. The Nasdaq traded 645 million shares, and decliners there outnumbered advancers by almost 5-to-1.

Crude oil for July delivery fell $1.39 to $72.58 a barrel. The Energy Select Sector SPDR (NYSE: XLE ) fell $2.52 to close at $50.53.  

August gold rose $11.90 to $1,226.90 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU ) fell 0.9 points to 173.02.

What the Markets Are Saying

Our internal technical indicators are now grossly oversold, and the sentiment numbers show the same result. The public is now terrified of stocks, remembering the dramatic fall in prices from 2007 to 2009, and afraid that it will happen again. And the news, especially from Europe, and now Asia, is so grim that many investors are convinced that even if the U.S. economy manages to blunder through, they want nothing to do with stocks.

Technically, we can't blame the average investor for that emotional reaction to stocks. With every major index now below its 200-day moving average, there has been significant technical damage done to virtually all U.S. markets. The Dow Industrials haven't been above their 200-day line for seven trading sessions. And after fighting to stay over the 200-day line for four days, even the Nasdaq closed below it yesterday.

Stocks have fallen sharply from the highs of just six weeks ago, and now the major resistance to rallies sits just several points above the current close for each index. For the Dow that number is 10,285, for the S&P 500 it is 1,107, and for the Nasdaq it is 2,230 -- each number representing the respective index's current 200-day moving average. Until a sustained rally breaks above these numbers, the pressure is downward.

ChangeWave Investing editor Josh Levine, an excellent fundamental analyst, correctly points to many factors that make today's stock prices look very enticing, with the S&P 500 down more than 10% from its April high. And a recent ChangeWave Alliance survey finds that the U.S. consumer is alive and well, and that the economic recovery is on track. Furthermore, contagion to the U.S. economy from Europe appears much less likely than a few weeks ago, and one impact of the European banking crisis has been lower gasoline prices in this country.

But Josh also adds, "Despite my bullishness, the best approach is to remain patient and use discipline. Let the market come to you by using the major moving averages (i.e., 20-day, 50-day and 200-day) as guides." 

Josh is wise to be cautious. We should shortly know if the all-important support at the February lows of the key indices will hold firm or not. Patience is the key to success. As Josh said, "Let the market come to you."

Today's Trading Landscape

Earnings to be reported before the opening include: Canadian Solar, Daktronics, Isle of Capri Casinos, Layne Christensen, Medical Action, RBC Bearings, Shoe Carnival and United Natural Foods.

Earnings to be reported after the close include: ABM Industries, Applied Signal Technology, Coldwater Creek, Copart, Cyberonics, Dynamex, Greif and Hovnanian Enterprises.

Economic reports due: Bank reserve settlement, motor vehicle sales (the consensus expects 8.9 million), MBA purchase applications, Challenger Job-Cut Report, ICSC-Goldman Sachs store sales, Redbook and pending home sales index.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks


Sam Collins

Sam Collins

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