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Signs Point to Pullback Ahead

Posted
11/15/2010 3:35:00 AM
By: Sam Collins
Referenced Stocks:BA

On Friday, world markets fell sharply when China signaled that it might tighten its monetary policy in order to counter inflation. U.S. stocks pulled back as well, with the Dow falling to its lowest levels since Nov. 22, giving back all of the gains made since the midterm elections. But while the Dow fell 0.8%, the Shanghai Composite fell 5.2%. Materials stocks, which could take a direct hit from the Chinese decision, led the sectors of the S&P 500 lower.

In Europe, stocks fell again on fears of another bailout of Ireland's debt.

In corporate news, The Boeing Company (NYSE: BA ) fell 3.5% following a downgrade by Bernstein Research. The Walt Disney Company (NYSE: DIS ) was up 5.1% on rising bookings at their theme parks. Intel Corporation (NASDAQ: INTC ) rose 1.4% following a dividend increase of 15%. NVIDIA Corporation (NASDAQ: NVDA ) jumped 5.2% after beating Q3 estimates, and Dillard's, Inc. (NYSE: DDS ) was strong, up 9.7% on much higher Q3 earnings than expected and a strong profit margin.

The yield on the 10-year Treasury note rose to a new two-month high - 2.754% from 2.538% a week ago. And the greenback rose 2% against a basket of currencies. But the euro held its own, being quoted late on Friday at $1.3693 compared with $1.3659 on Thursday.

At Friday's close, the Dow Jones Industrial Average fell 91 points to 11,193, the S&P 500 fell 14 points to 1,199, and the Nasdaq was off 37 points at 2,518. The NYSE traded just over 1 billion shares with decliners ahead of advancers by 4.8-to-1. The Nasdaq traded 613 million shares with decliners ahead by 4-to-1. For the week, the Dow was off 2.2%, the S&P 500 lost 2.2%, and the Nasdaq fell 2.4%.

Crude oil for December delivery fell $3.12 to $84.69 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) fell 94 cents to $62.94. December gold fell $37.80 to $1,365.50 an ounce on moves by China to curb inflation. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) fell 5.93 points to 216.1.

What the Markets Are Saying

While Thursday's pullback could be attributed to just one stock's bad day - Cisco Systems, Inc. (NASDAQ: CSCO ) - Friday's continued selling is more troublesome. On Friday, each major index fell through its near-term support and continued deep into the next support zone.

For example, the S&P 500 drove to an intraday low of 1,194 and into the wide zone of 1,174 to 1,210. It and the Dow spent most of Friday afternoon gaining against early losses, and perhaps that momentum will carry through today. The bright spot is that the S&P found support at its 20-day moving average at 1,195. And the NYSE Composite and Nasdaq also bounced from their 20-day moving averages.

But the Dow Industrials failed to hold at the 20-day moving average, so its near-term trend is down while the other indices are sideways. Moving Average Convergence/Divergence (MACD) on all of the indices has signaled that a pullback is coming and could last for several weeks as the market tests the major support lines at Dow 11,000 and S&P 1,174.

The upside goal of 1,200 to 1,220 is still our target, but before buyers return, the enormous gains of October will most likely result in a two-to-four-week consolidation that began following the election. Day traders may want to short into any quick rallies, while longer-term investors should hold cash and wait for the next buying opportunity.

For one ETF you can use to take advantage of a pullback, see the Trade of the Day .

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 .

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .