On Wednesday, the major U.S. averages fell for the third straight day following declines in both Europe and Asia. Stocks fell 4% in Japan, and stocks fell 1.4% in England following the biggest change in its central bank’s policy in four years.
Banks and other financial stocks took a hit as the impact of Department of Justice lawsuits against Bank of America (BAC) worried investors that the group could be under scrutiny. But in a low-volume session, the biggest surprise was a decline of 0.7% in the Dow Jones Transportation Average, which many consider a gauge of future manufacturing results.
At the close, the Dow Jones Industrial Average was off 48 points at 15471, the S&P 500 fell 6 points to 1691, and the Nasdaq closed at 3654, off 12 points.
The NYSE traded just 657 million shares and Nasdaq crossed 398 million shares in one of the lightest trading days of the year. Decliners outpaced advancers on both the Big Board and Nasdaq by more than 2-to-1.
Although the overall trend is bullish, the near-term is in doubt. Note two inflection points: the May closing high at 15409 and the July low of 15405. Just four sessions ago, the Dow industrials broke to new highs. However, the break was followed by three days down, and yesterday’s low came perilously close to the support line connecting the two highlighted points. A break of the line would likely result in a test of the 50-day moving average at 15,239 (blue line). Also, MACD has flashed a sell signal.
Like the industrials, the Dow transports broke to a new high and then rolled over in an even deeper correction with four consecutive down days. By penetrating both its near-term bullish support line and 20-day moving average on an opening gap down, its near-term trend must be considered very weak.
The more income-oriented Dow index — the Dow Jones Utility Average — rose yesterday and flashed a CBR buy signal (our proprietary indicator). And it closed slightly above its 20-day moving average at 504.17.
Conclusion: After six weeks of one of the most aggressive advances on record, the small- and midcap stocks are suffering an inevitable correction. But yesterday’s charts show that the more staid Dow series of indices also appear to be losing strength, and that could spell trouble for the entire market.
Jeff Saut notes that equities appear to be losing strength when gauged by the NYSE Advance/Decline Line, which measures the difference between the number of advancing and declining issues. When the market makes new highs, technicians like to see more stocks make new highs. But the recent A/D line did not show more new highs and instead showed fewer stocks making new highs — this is a non-confirmation of the recent breakout. And, along with our charts of the Dow indices, it makes me wonder whether the August breakout was “false.” If so, we could be in for a serious round of profit taking.
Tomorrow, I’ll provide downside targets for a possible market correction.
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.