A weak global economy, as evidenced by a decline in China’s PMI manufacturing report and a disappointing report from Germany, triggered the second worst day for the indices this year.
Along with the foreign weakness, the Philly Fed reported a Flash PMI manufacturing number that was the worst in 11 months. But existing home sales came in at a level that was expected. Then, following the close, Moody’s cut the ratings of the major banks by 2 to 3 notches.
The overall economic situation elicited a bearish recommendation from Goldman Sachs and the Dow Jones Industrial Average fell 251 points to 12,574. The S&P 500 lost 30 points at 1,326, and the Nasdaq plunged 71 points to 2,859. The NYSE traded 864 million shares and the Nasdaq crossed 482 million. On the Big Board, decliners exceeded advancers by 4.3-to-1, and on the Nasdaq, decliners were ahead by 3.3-to-1. Declining volume on the NYSE was ahead by almost 14-to-1.
A violent reversal Thursday from the major resistance at 1,358 drove the S&P 500 through support at its 50-day moving average (blue line) and the support (now resistance) line at 1,336.
Both volume and breadth increased as fear spread that a global recession was under way. The selling was steady throughout the day with hardly a snort of a response from the bulls, and prices ended near the low of the day.
Despite the steepness of the decline, there are several levels of support. The first is the 20-day moving average at 1,320, and then the upward slanted line at 1,313. But the force of the decline was so broad that they will most likely give way. The S&P 500’s major support then is at its 200-day moving average at 1,295.
Like the S&P 500, the Nasdaq took a severe beating on Thursday. Not only did it fail to secure the resistance at 2,940, but it sliced through its 50-day moving average and the support (now resistance) line at 2,882.
Its next support is at the 20-day moving average at 2,841 and the upward slanting line at 2,820. But also like the S&P 500, its best hope of immediate support is with the 200-day moving average at 2,784. The line at 2,737 is the next most important number since it is the high of October.
Conclusion: Yesterday’s steady round of selling, which crushed several important zones of support, has reversed both the near- and intermediate-term trends to down. The selling picked up steam as one nasty piece of headline news after another hit the tape. By the close, it had almost turned into a rout. And it didn’t stop there — the aftermarket trades continued to decline as a result of Moody’s cut in bank ratings.
We may see an extension of selling this morning, but it could be short-lived since investors were aware that Moody’s was going to cut ratings. Unless a gap down through the immediate support at the 200-day moving averages occurs, short sellers should consider covering for a nice, quick profit.
The big question: Will the Fed consider the international situation so grave that it will announce QE3 well before they had anticipated? I wouldn’t hold my breath on that one. Minor reversals up should be used as selling opportunities since the immediate trends are now down.
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.