Stocks closed Tuesday with a rush of selling. The market was led lower by small caps, with the Russell 2000 down 1.7%. But the decline was broad based, as all 10 sectors of the S&P 500 fell.
The losses were blamed on weak European economies, especially Germany, which issued a disappointing industrial production report. It showed a 4% drop in August from July, compared with an expected decline of just 1.5%.
The fear is that Europe’s weakness will “cross the pond” and impact Q4 economic results here. A report from the International Monetary Fund said it expects growth for next year to come in at 3.8%, down from an earlier estimate of 4%.
The third-quarter earnings season begins today with the traditional report from Alcoa (AA). The Federal Reserve’s minutes of its September meeting are due today, as well. As a result, volatility is expected to be high.
At Tuesday’s close, the Dow Jones Industrial Average fell 273 points to 16,719, the S&P 500 lost 30 points at 1,935, the Nasdaq plummeted 70 points to 4,385, and the Russell 2000 gave up 18 points at 1,076.
In the struggle for large-cap stocks, i.e., the generals, to remain positive, it is looking more likely that they are about to be defeated.
The Dow broke down from key resistance at its 50-day moving average and the support (now resistance) zone at 16,934 to 17,140. The next support — the 200-day moving average at 16,586 — is crucial. MACD is oversold but not by as much as in August.
The Nasdaq’s lower line of support at 4,368 is still holding. If penetrated, the next support is at its 200-day moving average at 4,296.
The Russell 2000 is weakest of all major indices. On Tuesday, it came within a point of breaking down through the low of last week at 1,077.96, and closed at its low of the day. In other words, the soldiers are retreating.
Despite comments by some technicians that death crosses have little long-term impact, they do have an enormous short-term effect.
Conclusion
Tuesday’s gap down on the Russell 2000 and close at the low of the day should cheer the bears. A rally today is unlikely, but should we get one, traders should sell into it.
The first hour of trading should tell us much about the remainder of the day, since it is likely that whatever happens on the opening will be countered at the close, i.e., up on the opening, down on the close or vice versa.
Investors should remain in a strong cash position, only buying stocks that have solid fundamentals and have been pommelled by overzealous short sellers.
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.
