Tuesday, November 01, 2011

Daily Market Commentary: Confirmed Distribution

While Monday's selling could have been attributed to profit taking, Tuesday's had more in common with panic selling. Volume climbed significantly as indices were driven down to (or just below) support and/or 20-day MAs. Indices at 20-day MAs offer a long-side play from the open - assuming no gap higher.

The S&P was pushed further away from 1,260, confirming a 'bull trap' which will be a source of supply on the next rally. Tuesday's close on the 20-day MA will offer traders a short term play off the open assuming the index starts the day at its 20-day MA. The selling volume is a concern and should the market weaken pre-market then the next opportunity for buyers will be the 50-day MA currently at 1,190.


The Nasdaq is on firmer footing. The morning gap down didn't lead to a broader sell off (bad though the gap was) and the index was able to finish the day near 2,616 support and its 20-day MA. Despite the proximity of support the Nasdaq has under-performed against the S&P over the past couple of weeks. However, it looks better positioned to push higher than its Large Cap brethren.  Alternative support is offered at the 50-day MA currently at 2,552.


The Russell 2000 has outperformed both the Nasdaq and S&P since the middle of October but today's selling has confirmed a 'bull trap' at 731; advances above reinstated resistance will encounter supply as far as its 200-day MA at 778. Despite the selling the index hasn't made it to its 20-day MA at 706 - so there is room for weakness off the open without violating support.


Wednesday's trading will be determined by premarket action. Should indices start near their 20-day MAs it will be a long-side play (perhaps for a couple of days). If there is a risk of a gap down from the open then 50-day MAs become the buy point. Overall, this looks like a buyers pullback and will remain so unless August swing lows are breached (with the September swing low the last line of defense in this regard).

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Trading Strategy Marketplace Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.


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