Jim Woods

Time for Traders to Exit the Market

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Editor's note: OptionsZone editor Jim Woods will be filling in for Sam Collins today. 

On Friday, in a classic day of profit-taking, the Dow Jones Industrial Average (DJI) and its companion indices took back the gains of the week, closing at a small loss on light volume. The mild sell-off occurred despite gains in the housing market and better-than-expected earnings from a key technology stock and a key financial stock.

American Express (AXP) fell 5.1% despite better earnings, but Microsoft (MSFT) jumped 5.1% following its Q3 report that came in with better-than-expected earnings. Amazon.com (AMZN) astounded analysts by posting a 69% earnings gain, and the stock cooperated by rising 27%. 

The Dow Jones Transportation Index (DJT) fell 3.5% after a nasty forecast by Burlington Northern Sante Fe (BNI) saying that freight demand had not yet turned the corner. Since this is a key indicator of the economy, the index led other groups lower. Coupled with a rally in the U.S. dollar and a decline in commodities, sellers ruled the day.

At the close, the Dow was off 109 points to 9,972, the S&P 500 (SPX) fell 13 points to 1,080, and the Nasdaq (NASD) was down 11 points at 2,154. 

The NYSE traded 1.3 billion shares with decliners ahead of advancers by 3-to-1, while the Nasdaq traded 807 million shares with advancers leading by the same margin.

December crude oil fell 69 cents to $80.50 a barrel, and the Energy Select Sector SPDR (XLE) lost $1.15, closing at $58.30. 

December gold fell $2.20 to $1,056.40 an ounce, and the PHLX Gold/Silver Index (XAU) fell $2.03 to $172.09.

For the week, the Dow lost 0.2%, the S&P 500 was off 0.7%, and the Nasdaq fell 0.1%.

What the Markets Are Saying

Friday's sell-off despite the excellent earnings from Microsoft and Amazon, and a favorable housing report, appears to be a case of stocks rallying on the expectation of good news, with the start of the move higher beginning Oct. 5, at S&P 500 1,025, and ending Oct. 21, at 1,081, when the news was announced.

The S&P has had trouble breaking through the bullish resistance line of the bull channel since March. So the sell-off was no surprise, and we warned of the possibility of a reversal last week. But Friday's action was a clear technical signal that prices will likely head back down to the well-established support line at 1,050.