An Early Warning Signal in the Making

The big news of the day was the merger of NYSE Euronext and Deutsche Borse AG, with the German exchange holding controlling interest of 60%. The deal follows other international exchange combinations: Toronto's TMX Group and London Stock Exchange Group, and Singapore Exchange and Australian operator ASX Ltd.

In other news the Dow fell under the impact of a slide by energy stocks Exxon Mobil (NYSE: XOM ) and Chevron Corp. (NYSE: CVX ), and investors' fears of creeping inflation.

Daily Stock Market News

Dow: -42 points at 12,227

S&P 500: -4 points at 1,328

Nasdaq: -13 points at 2,804

Volume and Breadth

NYSE: 929 million shares traded; decliners ahead 1.6-to-1

Nasdaq: 543 million shares traded; decliners ahead 1.6-to-1

Futures and Related ETFs

March Crude Oil: -49 cents at $84.32 per barrel; Energy Select Sector SPDR (NYSE: XLE ) -79 cents at $74.95

April Gold: +$9 at $1,376.30 an ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU ) +1.67 points at 209.79

What the Markets Are Saying

Low-volume trading limited to a narrow range has become the standard lately. And yesterday was more of the same. Stocks opened lower and spent most of the day trying to make up for the early losses, but in the end, succumbed to mild selling.

But there was no technical damage as stocks failed to pick up downside volume, and the trading looked more like a day in August, with most traders at the beach, than a cold day in February.

"Sell in May…" is months away, but a correction of the current trend should be expected due to the steep slope of the advance line on the charts of the leading exchanges. Technicians get concerned when the major indices drive above their 200-day moving averages by more than 10%, and the S&P 500 is now over 14% above the key moving average.

But despite the concern caused by technically overbought markets, there is no reason to sell unless other technical indicators tell us that a trend change is occurring. I've had several e-mails asking about the terms "overbought" and "oversold." These terms are used by technicians who study indicators that have historically predicted moves either up or down in the stock market. One of those leading indicators is the Moving Average Convergence/Divergence (MACD) , often called just the "MacD," designed by the famous market technician Gerald Appel.

Although the term sounds complicated, it really isn't. I use the traditional fast-moving exponential average of 12 bars (days) and slow exponential moving average of 28. All this indicator is saying is that when a fast-moving average moves through a slower moving average, it has significance. When the fast moves up through the slow it gives a buy signal, and when the fast moves down through the slow, it gives a sell signal.

Below is a current illustration of MacD's record to correctly predict short-term trading buy and sell signals for the Dow Jones Industrial Average over a seven-month period.

The red line is the fast average; the blue is the slow. The light blue line chart in the middle is the difference between the slow and fast indicators. When the differences are wide and the line closes quickly, as in early December, the crossover's predictive value is considered to have greater significance.

Note that the August sell at Dow 10,379 was followed by a buy signal in early September at 10,320 for a gain of 59 points. The sell in November at 11,283 netted a gain of 963 points, and the buy at 11,362 in December has a current gain of 864 Dow points for a total gain of 1,886 points.

It appears that we could see a minor crossover within the next several days. However, the difference between the moving averages (light blue line chart) is not great, so if it occurs, it is likely to have minor significance.

Since it would be irresponsible to trust a single indicator, regardless of its reputation, I depend on several internal indictors, plus several sentiment indicators. I'll cover each of these in the coming weeks.

For my top stock pick , 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 .

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

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

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