Sam Collins

Correction Could be Around the Corner

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Stocks broke a three-day losing streak yesterday as traders grabbed for undervalued shares. But it was not easy going with a sell-off in the last half hour of trading taking away most of the earlier gains. 

There were several strong earnings reports that resulted in sporadic rallies. Before the opening, AK Steel (AKS) reported better-than-expected earnings, as did Halliburton (HAL), Sealed Air (SEE) and Eaton Corp. (ETN).

Apple (AAPL) rose more than 2% in anticipation of its earnings, which came after the closing bell. Apple beat earnings estimates by a large margin, reporting $3.67 per share versus a $2.07 estimate, and the stock traded higher in the aftermarket.

But sour economic numbers kept investors from jumping on stocks that in three days had given up the gains made in three weeks. Existing home sales for December fell 16.7% from November sales to an annualized rate of 5.45 million units versus the expected rate of 5.9 million units. 

International markets were encouraged by the sale of the Greek government's new 5 billion euro five-year syndicated bond issue. Investors were quick to grab the new issue, which sold out in just three hours.

But the real test of the market will more than likely come this week following hearings on the bailout of AIG (AIG), the State of the Union address, a Fed interest rate decision and the confirmation vote on Fed Chairman Ben Bernanke.

At yesterday's close, the Dow Jones Industrial Average (DJI) was up 24 points to 10,197, the S&P 500 (SPX) gained 5 points at 1,097, and the Nasdaq (NASD) gained almost 6 points at 2,211. 

The NYSE traded just over 1 billion shares with advancers edging decliners by about 5-to-4. The Nasdaq traded 655 million shares, but decliners were slightly ahead of advancers.

March crude oil rose 72 cents to $75.26 a barrel, as it too broke a three-session losing streak. The Energy Select Sector SPDR (XLE) rose 37 cents to $56.67. 

January gold rose $6 to $1,095.20, and the PHLX Gold/Silver Sector Index (XAU) fell $1.54, closing at $157.24, which puts prices smack on the XAU's 200-day moving average.

What the Markets Are Saying

Yesterday, I noted that in just two days the intermediate trend had turned from positive to at best questionable and at worst a severe correction. The most startling of the declines of the major indices was the S&P 500, which sliced through several zones of support like a razor. Even the venerable 50-day moving average gave way to an avalanche of sales -- and it accomplished it in just hours.

Several other technical factors make this pullback look more like it could turn into a genuine, full-fledged correction, in the order of 5% to 15%.