Despite better-than-expected earnings on Friday from Advanced Micro Devices (AMD), American Express (AXP) and Google (GOOG), each fell sharply, as the market disregarded their quarterly performances.  General Electric (GE) and McDonald’s (MCD) closed slightly higher and had outstanding earnings, too, only to have their shares fall in the last half hour of trading.

The Dow Jones Industrial Average fell triple digits for the third day in a row as investors continued to dwell on tightening of credit in China, and it was the worst percentage loss for the Dow in more than two months. 

For the week, the Dow was off 4.12%, the deepest loss since last March.  And the S&P 500 fell 3.9% for the week.  Both are now negative for the year by more than 2%.

Even though many companies are beating quarterly estimates, it appears that the gains are the result of cost-cutting and not top-line growth.  Both Capital One Financial (COF) and American Express saw revenues slip despite a stronger bottom line, and COF fell more than 5 points while AXP was down over 3 points.  Consumer finance stocks, as a group, fell over 9% on Friday.  Even regional banks, which earlier in the week bucked the selling, saw prices decline, and the group fell 2.3%.

At the close, the Dow Jones Industrial Average was off 217 points at 10,173, the S&P 500 fell 25 points to 1,092, and the Nasdaq fell 60 points, closing at 2,205.  The NYSE traded 1.5 billion shares with decliners ahead of advancers by a margin of 5-to-1.  The Nasdaq traded 865 million shares with decliners ahead by 5-to-2.

March crude oil fell $1.34 to $74.54 a barrel, and the Amex Energy SPDR (XLE) fell $1.37 to close at $56.30.  February gold fell $13.50 to $1,089.70 an ounce.  The PHLX Gold/Silver Index (XAU) closed at $158.78, down 71 cents, with the low of the day touching its 200-day moving average, creating a double bottom with the Oct. 30 low of $152.35.

What the Markets Are Saying

Friday’s broader sell-off broke the Dow’s double-bottom at 10,236 and crushed the 50-day moving average, which was at 10,452.  The S&P 500 plunged through its 50-day moving average at 1,116.  The Nasdaq, too, has cracked the 50-day moving average and, like the other indices, has broken its intermediate support line and turned down. 

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And so, after eight months of moving higher, the stock market has clearly signaled that a serious correction is unfolding.  In just two days, the near- and intermediate-support zones of the most followed indices have been violated, and a support zone on the S&P 500 that took almost six weeks to develop has been seriously penetrated.

That zone at 1,070 to 1,120 corresponds to the Dow’s zone at 10,240 to 10,500, which has already fallen.  The next zone for the Dow is 9,900 to 10,240.  As for the Nasdaq, its next support is at 2,110 to 2,210, and so it has just begun to work into that major area which took from September until early December to develop.

There is an important support line at S&P 1,080, which is a quadruple bottom formed between Nov. 12 to Dec. 9.  This is the next important line for that broad-based index on which traders and investors alike will probably focus.  It is likely that we will at least see a bounce from this support line.

At this stage, this market’s drop roughly corresponds to the first correction after the triple bottom of the ’02-’03 bear market.  The S&P had rallied from under 800 to 1,163 in 11 months, but in seven days it fell to 1,102 before bouncing.  That fall signaled the start of its first major correction.  We have fallen from 1,150 to 1,115 in four days and could drop a bit more.  But much will depend on the monetary outlook in both China and the United States, and the markets will no doubt reflect any announcement from either central bank. 

All of the internal indicators have moved into their deeply oversold areas, so I would expect a reflex rally to develop this week and perhaps even today.  But even if a rally does occur in the next couple of days, all short-term positions should be liquidated.  Stop-loss points should be set now just in case a deeper sell-off develops. 

But also be advised that these comments are aimed at the trader and short-term investor.  There are still many support zones under the current prices, so if you are a long-term investor then this doesn’t apply to you.  The overall trend is still up but the bull is napping and when he awakes he’ll be in an aggressive mood.

Today’s Trading Landscape

Earnings to be reported before the open include: AK Steel, Bank of Hawaii, CNH Global, Eaton, Halliburton, LM Ericsson, PrivateBancorp, Quest Diagnostics, and Sealed Air. After the close: Albemarle, Allegiant Travel, Amgen, Apple, Atheros Communications, Celadon Group, Crane, Equity Lifestyle Properties, Graco, Heartland Financial, Jacobs, JDA Software, Kilroy Realty, Matrixx Initiatives, Mindspeed Technologies, Nara Bancorp, Olin, Packaging Corp of America, Parexel, PLX Technology, Renaissance Learning, RLI Corp, SL Green Realty, Texas Instruments, TheStreet.com, VMware, Volterra Semiconductor, Zions Bancorp, and Zoran.

Economic report due: Existing Home Sales (the consensus expects 5.9 million).

Late news:  Earnings reported — Bank of Hawaii (BOH) at 84 cents versus estimates of 75 cents, CNH Global (CNH) at 20 cents versus estimates of a 1-cent loss, LM Ericsson (ERIC) at a loss of 10 cents versus estimates of $1.38 and PrivateBanCorp (PVTB) at 30 cents versus estimates of a 33-cent loss.

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