European stocks fell for the third straight day, and the Dow industrials had their worst day in three months. The sharp decline was blamed on a concern of a domestic and global economic slowdown. However, the Federal Reserve’s September Beige Book said that economic activity “expanded modestly since the last report.” Residential real estate also showed modest improvement, although conditions in the Richmond area deteriorated slightly.
At Wednesday’s close, the Dow Jones Industrial Average was off 129 points at 13,345, the S&P 500 fell 9 points to 1,433, and the Nasdaq was down 13 points to 3,052. The NYSE traded 590 million shares and the Nasdaq crossed 372 million. Decliners were ahead of advancers on the Big Board by 1.6-to-1 and on the Nasdaq by 1.2-to-1.
So far, despite selling in the more speculative stocks, the S&P 500 has held. However, the major breakout line at 1,418-1,419, as well as the 50-day moving average at 1,426, are significant enough support lines that if they fail to hold we must expect a further correction.
MACD flashed a sell signal in mid-September, and its histogram (at the bottom of the chart) is close to the oversold area of August, but nowhere near the deep penetration of March, and I don’t expect it to reach that level.
A type of head-and-shoulders breakdown occurred when the Nasdaq broke 3,100. I won’t go into the technical intricacies of a textbook shoulder-head-shoulder (SHS), but for the sake of argument, it could still conduct itself like the real thing. If so, the target for the breakdown is 3,000, which also coincides with a support line drawn from the July high. Like the S&P 500, the MACD is oversold, so it could turn higher.
With the close below its 20-day moving average, the SPDR Gold Shares (NYSE:GLD) has broken down from a double-top. MACD has issued a sell signal, and high volume at the top in September is characteristic of a buying climax.
This does not mean that gold is going into a bear market — only that it is correcting an overpriced situation resulting from the August-to-October run. There is massive support for GLD from its 200-day moving average (red line) to its 50-day moving average (blue line).
New buyers should wait for prices to adjust to the solid buying zone for GLD between $160 and $165.
Conclusion: The stock market is in a minor correction. Much of the major indices’ pullback is due to unrest in Spain, Italy and Greece. But Q3 earnings are overhanging the market and could restrain prices until the reporting season is over.
The election and fiscal cliff weigh heavy on investors, so many small investors are staying away from stocks. But there are always opportunities, and investors should remain poised to buy stocks that are fundamentally sound, pay dividends and are selling at an attractive price.
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.