8 reasons the selloff could get much worse
Adam Sarhan, founder and chief executive officer of New York-based Sarhan Capital, said that over the past eight weeks, U.S. stock markets undercut their 50-day moving average lines, which marked support for most of the summer, and are now serving as resistance to any gains.
“And now the major averages are testing their 200-day moving average lines which are currently serving as support,” he said. A couple of major indexes broke those support levels on Wednesday, and that could open up the way for more selling, he warned.
Moving averages offer average closing prices for a stock or index over a defined period of days, helping traders identify trends.
Among the 200-day moving averages to watch:
- 12,991 for the Dow Jones Industrial Average DJIA -0.31% , which was broken Wednesday.
- 1,380 for the S&P 500 SPX -0.37%, which is still holding.
- 2,982 for the Nasdaq Composite NDAQ +0.29% , also broken Wednesday.
Sarhan said a key question for now is whether the current pullback — so far a relatively mild one — gets worse and enters correction territory, typically defined by a decline of more than 10% from a recent high.
He identifies dangers for the market that could trigger more selling:
- Continuing technical deterioration for heavy-hitting stocks like Apple Inc. AAPL -1.50%, which he said broke its 200-DMA last week ;
- A European debt-crisis flare up;
- Signs of U.S. economy or global economic slowdown;
- A new Chinese government that isn’t so friendly to the U.S. (Read: China’s leadership transition raises questions);
- And last but not least, the U.S. going over the fiscal cliff.
“Bottom line: Investors want to know what catalyst (s) will help the market rally from here,” Sarhan said.
Read: Will yesterday’s big decline be reversed?
– Barbara Kollmeyer
Follow The Tell blog on Twitter @thetellblog
Follow Barbara on @MWBarbaraKollmeyer