ISM Shows Manufacturing Contracted as Stocks Reverse and Close in the Red

In a surprise to the market data out of ISM showed the manufacturing sector contracted waking up sellers pushing the market lower. The market gapped to the upside with the hope the economy wasn’t in that bad of shape with Europe and China’s PMI data. At the open the NASDAQ hit the high of the day and was never able to recover. SPY and DIA staged an outside reversal day while IWM and QQQs were able to avoid the pattern. Volume was lower on the day compared to Friday’s massive volume surge from end of the month rebalancing. While today wasn’t an official day of distribution it was certainly a big warning sign to longs buying has been exhausted. We still have not seen a true follow-through day and it appears after today we may not see one. Tread carefully as today was not a good day for the market if it wants to push higher. The outside reversal gets negated if the market is able to retake today’s high. Volume doesn’t matter too much, but we’ll need to see the highs taken out if this market has any chance of moving higher. The other game changer was the reversals at major moving averages. For example the NASDAQ gapped above its 50 day moving average only to cut right back under it. This is not the type of price movement you want to see from the market whatsoever. To make matters worse for this rally off the November lows is market leadership. Two stocks DDD SSYS broke out last week and were looking good until the last few trading sessions. The reversals are a clear indication breakouts are failing and a big clue to the health of this uptrend. CVLT is hanging in there and with QIHU breaking out it will be important to watch how these stocks act over the next few trading sessions. Given the market conditions it is very difficult to hang onto these stocks for big wins. Remember, have an exit plan for any trades you make and do not get caught without one. Not a good start for the bulls this week. It is best to review your trading plan and execute!

The 4th Quarter Starts in Lackluster Fashion

NASDAQ 100 stocks lagged the broader market lead by MSFT and AAPL as the Dow Jones Industrial Average and Russell 2000 were able to close in the green. Volume ended the day lower than Friday’s inflated figures from end-of-the-month rebalancing. Overall the session wasn’t that inspiring, but it wasn’t entirely awful. Early on in the session optimism ran high with positive news from the ISM Manufacturing Index report showing the sector expanded when expectations were for it to slow. Price paid were a bit higher, but weren’t alarmingly higher. The close was decent with buyers stepping up and lifting the markets avoiding closing on the lows. Our uptrend remains with very little distribution piling up despite the bearish opinions of the market. Today’s reversal is not what you want to see from the market. Last year, however, the first day of October was not that great either. Even the second day, 10/4/2011 at 3pm looked dire until we got a rumor of a new bailout for Europe. While things may look dire now you just never know what the market will hand you the next day. Guessing where the market will be next is not a recipe for success and continues to keep traders from maximizing potential gains. Stick to a disciplined approach and play the odds rather than simply guessing. The election is not far a way at all! It will be nice to get away from the constant stream of political ads and banter. However, for this market it does appear we are looking like an Obama victory. We can debate polling tactics and have yet to have a debate, but there is one thing that is certain: no one knows where the market is going. Will Obama help the US avoid the mandatory spending cuts and tax hikes? Will Romney? Will either candidate get our fiscal house in order? It is very doubtful either candidate will resist the urge to spend and inflate the deficit higher. Then again, the Federal Reserve is pumping $40 billion a month into mortgage backed securities and it won’t matter. In the end, focusing on leading stocks and their price action is the way to go. Leave the guess work to others. We aren’t off to the best start to the quarter, but it could be far worse. Cut those losses.