Continued Stock Declines This Week Could Mean Market Correction

NEW YORK (The Street) -- The first warning that indicates risk of a stock market correction is when all five major averages are below their key weekly moving averages at Friday's close-- and the indices may be headed in that direction.

If stocks end below the following key weekly moving averages, the market could see further declines: 18,023 Dow Jones Industrial Average, 2,103.6 Standards & Poor's 500, 5,028 Nasdaq Composite, 8,608 Dow Transportation Average and 1.247.85 Russell 2000.

As of noon on Tuesday, the Russell 2000 had rebounded above its key weekly moving average.

The second correction warning occurs when all five averages have declining weekly momentum readings.

The reading for the Dow 30 is projected to decline to 61.68 this week down from 61.70 on June 5.

The reading for the S&P 500 is projected to decline to 72.71 this week down from 81.58 on June 5, falling below the overbought threshold of 80.00.

The reading for the Nasdaq is projected to decline to 78.97 this week down from 80.56 on June 5 also falling below the overbought threshold of 80.00.

The reading for Dow Transports is projected to decline to 17.08 this week down from 18.92 on June 5 falling further below the oversold threshold of 20.00.

The reading for the Russell 2000 is projected to rise to 61.59 this week, down from 60.94 on June 5, making small caps the key to preventing a technical correction.

There are warnings from the daily charts. The Dow 30 and S&P 500 are below their 50-day simple moving averages of 18,021 and 2,101.4, respectively. The Nasdaq and Russell 2000 are on the cusp of their 50-day simple moving averages of 5,012 and 1251.28, respectively.

The Dow Transports are trading below what technicians call a "death cross" where the 50-day of 8,630 is below the 200-day of 8,750.

Dow Transports ended Monday down 10.5% below their all-time intraday high of 9,310.33 set on Nov. 28, so this major average is already in correction territory.

Here's the weekly chart for the SPDR Dow Jones Industrial Average ETF (DIA), also known as Diamonds.


Courtesy of MetaStock Xenith

Diamonds were trading around $117.80 as of noon on Tuesday below their key weekly moving average of $179.66, which is negative, as weekly technical momentum is projected to decline to 63.75 this week from 74.25 on June 5.

Investors looking to buy Diamonds should place a good till canceled limit order to purchase the ETF if it drops to $150.82 and $145.24 which are key levels on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $183.91, which is a key level on technical charts for this week only.

Here's the weekly chart for the SPDR S&P 500 ETF (SPY), also known as Spiders.


Courtesy of MetaStock Xenith

Spiders were trading around $208.56 as of noon on Tuesday, below their key weekly moving average of $210.19, which is negative as weekly momentum is projected to decline to 74.92 this week from 82.66 on June 5. This reading is thus projected to fall below the overbought threshold of 80.00.

Investors looking to buy Spiders should place a good till canceled limit order to purchase the ETF if it drops to $205.08, which is a key level on technical charts until the end of June. Lower key levels of $158.47 and $155.56 are on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $215.72, which is a key level on technical charts for this week only.

Here's the weekly chart for the PowerShares QQQ Trust ETF (QQQ).


Courtesy of MetaStock Xenith

PowerShares QQQ are trading around $107.83 as of noon on Tuesday below its key weekly moving average of $108.76, which is negative as weekly momentum is projected to decline to 76.76 this week from 79.90 on June 5. If this condition holds at Friday's close the weekly chart will shift to negative from positive.

Investors looking to buy the PowerShares QQQ ETF should place a good till canceled limit order to purchase the ETF if it drops to $105.64, which is a key level on technical charts until the end of June. A lower key level of $89.24 is on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $113.10, which is a key level on technical charts until the end of June.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue, while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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