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If You’re a Bull, Run for the Hills

Failure to follow through with a back-to-back rally is more evidence of a very weak market


Following a lower opening on Wednesday, stocks advanced during the morning hitting their highs around noon. But then, renewed worries over the possible breakup of the euro zone and lower U.S. retail sales drove stocks lower. Only a late rally saved the Dow industrials from a triple-digit loss.

The Dow Jones Industrial Average closed at 12,496, off 77 points, the S&P 500 fell 9 points to 1,315, and the Nasdaq was off 24 points at 2,819. Volume contracted as the NYSE traded 703 million shares and the Nasdaq crossed 437 million. Decliners were ahead of advancers on both exchanges by about 2-to-1.

We often use the term “broad market decline.” That means that stocks of almost every class, large cap to small cap, as well as industry sectors, are heading south. I watch many sector charts and indices daily to see if any are breaking opposite to the major trend, looking for an early indication of a turn. Currently, I see none.

S&P 600 Chart

Trade of the Day Chart Key

The chart of the S&P 600 SmallCap Index is an example of a group of stocks that could not be more different in size and makeup than its cousin the S&P 500. And yet its pattern is almost identical to the large-cap index.

Note the almost perfect head-and-shoulders top with a high at 471 and a neckline at 439. The minimum target for this formation is 407, and Wednesday’s close under its 200-day moving average, along with a new sell signal from the stochastic, confirm that the index is headed lower.

Conclusion: Wednesday’s failure to follow through with a back-to-back rally in the major indices offers more evidence of a very weak market. And its sensitivity to headline news should make every bull run for the hills.

Greek elections this weekend with a probable standoff due to the scores of political parties, more talk of deterioration in the Italian bond markets, and the Federal Reserve’s policy statement, which comes next week, provide enough uncertainty to keep the bears happy.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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