The market held its breath prior to the first report of Q4 earnings season, which is traditionally reported by Alcoa (NYSE:AA). With little economic data and fear that the quarter would not match the earnings of Q3, the S&P 500 fell for the second day after posting a five-year closing high on Friday.
The Boeing Company (NYSE:BA) was off 2.6%, hit by news of a fuel leak on one of its 787 Dreamliners. This was the second day in a row that a 787 had to cancel flights due to equipment failures.
At Tuesday’s close, the Dow Jones Industrial Average was off 55 points at 13,329, the S&P 500 fell 5 points to 1,457, and the Nasdaq lost 7 points at 3,092. The NYSE traded 691 million shares and the Nasdaq crossed 385 million. Decliners exceeded advancers on both exchanges by about 1.2-to-1.
It is always dangerous to anticipate the confirmation of a head-and-shoulders formation since over half of the potential formations dissolve. Nevertheless, the pattern appears to be forming with a neckline at about 1,466, which is Friday’s close. A break and close above the neckline would trigger a confirmation of the pattern and yield a target of 1,589 or so.
Positive chart patterns exist on most of the major indices despite some internal indicators that are overbought. Therefore, the aggressive investor could take long positions now and ride out a correction. Prudence, however, dictates that we wait for the breakout before taking new positions since a correction could turn into a nasty 5% drubbing. It’s the old story of it’s better to preserve capital than risk it on hunch.
Several readers have asked about the length of trends in terms of time. For example, what are short-term or near-term, intermediate-term, and long-term trends.
For the answer to that question, I like to go back to Charles Dow, the inventor of the Dow Theory. All modern technical analysis had its beginnings with Dow’s Theory, and understanding it will also help you decide whether you are a long-term investor, an intermediate-term trader, or a short-term, perhaps even a day trader.
The Daily Market Outlook attempts to clarify the technical trends of the market for investors and traders alike — not always an easy task for both writer and reader. Thus, it may be helpful to consider Dow’s concept of three trends — primary, secondary and minor — in order for you to decide what type of investor you are.
Primary, or major, trends are like the ocean’s tides. That is to say that a primary bull market is like an incoming or flood tide, which runs farther and farther up the beach until it finally reaches a high-water mark before it begins to recede.
While the tide is coming in, there are waves breaking on the beach — some incoming and some outgoing. While the tide is rising, each succeeding wave pushes a little farther up onto the shore, and when the tide has reached its maximum height, the waves recede, never quite reaching as far as their predecessors. The waves are like the intermediate trends.
Meanwhile, the surface of the water is in constant agitation as wavelets and ripples move along with and against the major trend. The wavelets and ripples are analogous to the market’s minor trends and are unimportant day-to-day fluctuations to long-term investors but followed closely by traders.
To sum up, the tide, waves, and ripples represent the primary (major), the secondary (intermediate), and minor (short-term) trends of the market.
Conclusion: Currently, the tide is rising, i.e., we are in a bull market. And the waves (intermediate trend) are still incoming, but becoming more aggressive. Finally, the wavelets are mostly flat, and so the near-term trend is sideways to down.
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.