Friday, October 21, 2011

The Time to Short Is Now Market struggling to maintain a push above its 50-day moving average

Despite a positive start yesterday, stocks sank in the afternoon when the Federal Reserve’s Beige Book was issued. It and the lower-than-expected earnings from Apple (NASDAQ:AAPL), along with the televised turmoil atConstitution SquareinAthens, turned stocks lower.

But the focus was mainly the Beige Book’s conclusion that the selling of short-term and buying of long-term bonds, called “Operation Twist,” failed to stimulate the economy. And the Beige Book noted a weaker or “less certain” outlook for the remainder of the year. The Wall Street Journal quoted one trader as saying, “The beige book tells you that the economy’s stalled out.”

QQQ Chart
Click to EnlargeTrade of the Day Chart Key

The PowerShares QQQ (NASDAQ:QQQ), the ETF, which represents the Nasdaq 100 index, has rallied above its 200-day moving average. But note that volume in the peculiar advancing right triangle is falling even as the ETF moves higher. Like Tuesday’s illustration of a rectangle, this type of triangle is a consolidation formation that usually breaks in the direction of the major trend. Perhaps it is no coincidence that just when a high-volume push is needed to pop it through resistance, volume is declining and the stochastic has issued a sell signal.

NYSE Chart
Click to Enlarge

And while technology stocks have rallied, the sector has had little impact on the broad market. Note how the broad market, as illustrated by the NYSE Composite, has been struggling to maintain a push above its 50-day moving average and that yesterday its stochastic issued a sell signal.

On Oct. 3, the Daily Market Outlook said, “The market is oversold and due for a bounce after the S&P 500 and the NYSE Composite have penetrated into last summer’s zone of support. Therefore, it would be wise to cover profitable short positions on any deep thrust into that zone and wait for another short-selling opportunity.”

That short-selling opportunity has arrived, heralded by faltering earnings from a key technology giant and a faltering economy.

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