Technical talk: Trim/sell selectively and tighten stops

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The comments below were provided by Kevin Lane of Fusion IQ.

Goldman Sachs (GS), the subject of civil fraud charges over its dealings in subprime mortgages, caused the rest of the financial sector to catch a cold at the close of last week.

On the heels of the selling in financials, all three indices, the Dow Jones Industrial Average, the NASDAQ and S&P 500 lost ground on the session.

The Goldman news, coupled with a very overbought market, triggered the rash of selling on Friday. While one day is not anything to worry about just yet, it does suggest that liquidity is not as strong as it once was. Typically, when liquidity is strong, markets can shrug off bad news and work higher. Friday’s trading session was one of the first in recent memory where the markets were not able to shake off the bad news.

Adding fuel to the selling were weak reports from Google (GOOG) and General Electric (GE), which both reported earnings that didn’t live up to forecasts or investor expectations.

At this point Friday’s activity remains a blip; however, the market’s inability to shake off bad news from GS, GOOG and GE suggests investors need to be very careful and not get sloppy given the elevated price levels.

At a very minimum, Friday’s action should tell investors it is time to review holdings and either trim/sell selected names or tighten trailing stops.

As seen in the chart below of the S&P 500 over the last 31 days, the trend still remains up. However, if we violate Friday’s low (1,186), expect the sledding to get more slippery.

Source: Kevin Lane, Fusion IQ, April 19, 2010.

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