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Market Lab Report - Premarket Pulse 10/26/17

Major averages fell closing roughly midbar on higher, above average volume as earnings results on a few key names came in weak. As stated in Wednesday's PMP, the parabolic rise in the Dow Industrials is not sustainable so a resting period of some magnitude either by way of sideways action or a more bona fide correction is due.

The markets used yesterday's earnings weakness as the excuse to sell off. Even though overall earnings have beaten expectations so far this reporting season, burrito food chain CMG and chip maker AMD both gapped lower. CMG reported weaker-than-expected earnings while AMD's outlook was not as strong as hoped.

“It is clear that markets are reacting to some disappointing earnings, because the economic picture remains robust,” said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research. Frederick expects investors will view pullbacks as buying opportunities. Indeed, the market has seen little in the way of any meaningful correction all year. When corrections have come, they have been short and sharp, reversing weeks worth of gains over a period of a few days or less. Corrections have been contained to typically within 3% off peaks. Majors such as the S&P 500 then often trade in a sloppy sideways manner for a time before baby-stepping to new highs making for a challenging environment.

A number of leading stocks have broken down such as VRTX and BABA. Both have violated their respective 50-day moving averages. For BABA, it is the first time such has occurred all year.

Mega-cap technology stocks AMZN, GOOGL, MSFT, and INTC all report earnings after today's close. 

Over in Europe, the European Central Bank decided to leave interest rates unchanged and announced that it expects to lower its monthly asset purchases to EUR 30 billion from EUR 60 billion in January. That pace of purchases is expected to continue until at least the end of September 2018. The Great Unwind begs the question how stock and bond markets will react. Will it be the straw that finally crashes the camel?

Focus List Notes:

BABA violated its 50-dma yesterday on higher, but below-average selling volume.

FEYE tested its 50-dma after running into resistance at its 20-dema, but this has already violated the 20-dema several days ago, triggering our recommended selling guide for the stock.

NFLX again held support at its 20-dema, closing at the line yesterday on volume that was -27% below-average.

VRTX has violated its 50-dma and has been removed from the list. You could certainly see this coming based on the weak action over recent days.

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