Wednesday, October 22, 2014

Time for the Pullback?

Sellers were going to make an appearance at some point and today was the day they paid a visit. Whether a larger pullback emerges will depend on events over the coming days, but today's selling did occur at some natural attack points for shorts.

The S&P finished with a 'bearish cloud cover,' but it did manage to hold declining resistance turned support. The 20-day MA has also entered the fray as an area for bears to work. But this wasn't the most bearish of the indices, and today's finish actually gives bulls a long play tomorrow (for a bounce off support).  Technicals also suggest a bounce.


While the S&P may give bulls something tomorrow, the Dow Jones Index is playing to bears. The rejection of the 200-day MA coincided with a failed test of former support turned resistance. An undercut of 16,350 would effectively confirm the retest of 15.855.


The Nasdaq 100 offers a more attractive entry level for shorts. There is a clear declining resistance level which was rebuffed on today's action.  Technicals have sided with bulls, so shorts shouldn't linger if such resistance is broken to the upside.


The Russell 2000 is in an odd position. It experienced the most bearish action on the day with its bearish engulfing pattern. This suggest further downside tomorrow, but given the strength of the October bounce it probably has the best support options, first of which will be the 20-day MA.  A weak finish on Thursday may offer a value play here.


Bulls should also watch the Semiconductor Index. I'm still liking the 'Island Reversal', but for it to stay true, Tuesday's breakout gap can't close. It will have the 200-day MA to help bulls tomorrow, although it may not be enough to protect in morning action.


For tomorrow, the Nasdaq 100 is perhaps the index to watch for shorts with the best risk:reward. Longs can look to the Russell 2000 if there a second day of selling, but if bulls come bursting out of the gates then the S&P might be the better long play.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com, and Product Development Manager for ActivateClients.com. You can read what others are saying about Zignals on Investimonials.com.

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