Wednesday was another risk-off day as investors retreated from equities with nine of the 10 S&P 500 sectors closing in the red. The emerging markets sell-off and a Federal Reserve decision to continue cutting back on its stimulus efforts resulted in the continuation of selling that began on Jan. 23.
Before the open, Turkey’s central bank shocked the market by raising their key interest rate 445 basis points to 12% in order to stem the flow of funds from its lira to the Japanese yen. But the move failed, and the yen and U.S. dollar rallied. Emerging markets stocks continued to sell off, and the yield on the 10-year Treasury fell to 2.675% from 2.75% on Tuesday.
AT&T (T) declined 1.16% following a meek outlook for 2014. Boeing (BA) lost 5.33% after beating Q4 earnings estimates but also lowering its 2014 outlook. And Yahoo (YHOO) dropped 8.71% following a revenue miss.
At Wednesday’s close, the Dow Jones Industrial Average fell 190 points to 15,739, the S&P 500 lost 18 points at 1,774, and the Nasdaq dropped 47 points to 4,051. The NYSE traded a total of 3.9 billion shares, of which 733 million were traded on its primary market. The Nasdaq crossed 2.2 billion shares. Decliners outpaced advancers on both exchanges by 3.2-to-1.
The S&P 500 fell slightly below the support zone at 1,775 to 1,813. But technical analysis isn’t an exact science, so for today, we will assume that it has held at the support line. However, the price action has been distinctly bearish with heavy downside volume. A further breakdown could result in a fall to the 200-day moving average or even to the October closing low at 1,656.
Conclusion: The S&P 500 is holding at the 1,775 line, but if it decisively penetrates that line on a close, look for a quick decline to 1,700 to 1,704 (200-day moving average). The 1,700 target is found by subtracting 1,775 from the high of 1,850 (75 points), and then subtracting that from 1,775, which gives us 1,700. A break below the 200-day moving average could result in a decline to the October low at 1,656.
But stocks are now very oversold on virtually every internal indicator. Thus, the chances favor a rebound to about 1,813, which would be a Fibonacci 50% retracement of the decline from January’s closing high.
If the rally develops but fails below 1,813, the momentum will remain negative. If, however, it manages to close above 1,813, momentum would again shift to the upside. I wouldn’t put much money on the latter possibility though.
The market is again reacting to Fed policy. Last year, that policy was to ease and the market rallied. So far this year, the Fed is mildly tightening, and the market is responding negatively. Don’t fight the Fed.
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.