Broad selling on Friday, especially in the final hour of trading, drove stocks to their lowest levels since the July/August sell-off. The decline put the Dow Jones Industrial Average in negative territory for 2014, despite being off just 4.7% from a record high in September.
Technology stocks and especially chip makers were hit hard when Microchip Technology (MCHP) issued a revenue warning and predicted the industry is in a “correction.” The PHLX Semiconductor Index fell 6.9%.
The sudden rush of selling was largely blamed on a weak global economy. Fear spread that the strong U.S. dollar would hurt international sales and weaken foreign markets further. Investors are worried this could produce lower-than-expected Q3 and Q4 earnings. And there is a perception that stock prices are high, despite a P/E of just 16.5 on the S&P 500.
At Friday’s close, the Dow Jones Industrial Average fell 115 points to 16,544, the S&P 500 fell 22 points to 1,906, the Nasdaq was down 102 points at 4,276, and the Russell 2000 fell 15 points at 1,053.
The NYSE primary volume was 15.9 million shares with total volume of 4.5 billion shares, and the Nasdaq traded 2.8 billion shares. On the Big Board, decliners outpaced advancers by 3.6-to-1, and on the Nasdaq, decliners were ahead by 2.7-to-1. Declining volume outpaced advancing volume on the NYSE by 12.3-to-1, the second day in a row that declining volume exceeded by over 12-to-1.
For the week, the Dow fell 2.7%, the S&P 500 was off 3.1%, the Nasdaq lost 4.5%, and the Russell 2000 was down 4.7%.Year to date, the Dow is off 0.2%, the S&P 500 is up 3.1%, the Nasdaq is up 2.4%, and the Russell 2000 has lost 9.5%.
The S&P 500’s chart is a bit complex, so let’s begin at the left side. Two highs, one on April 2, 2012, at 1,422, and the other on Sept. 14, 2012, at 1,475, mark the upper range of the normal bull market’s resistance and now support line. And it is also the top of a mean, or normal progression, channel.
From Sept. 14, 2012 to Nov. 16, 2012, the index corrected, followed by an accelerated bull channel with an abnormally sharp angle of advance. That angle invites high volatility, but despite the increased risk, it has held for more than two years, pushed along by the Federal Reserve’s easy money policy.
The bottom of that channel is a support line, and it corresponds to the 200-day moving average, which also accelerated at an abnormally high rate of advance. On Friday, that intermediate support line was broken.
If the market closes below the 200-day moving average, the bull market will not be over since the main, or mean, support line rests at 1,700. A drop to that line would merely be a “reversion to the mean” and a pullback to what would be “normal” in a modestly improving economy. A fall to 1,700 would amount to a mild correction of 15.8% from the Sept. 19 high, and a 10.8% decline from Friday’s close.
The chart of the Dow is much more straightforward than that of the S&P 500. Three strong negatives occurred last week. First, the 50-day moving average was decisively broken on Thursday. Second, the 200-day moving average at 15,593 was pierced on Friday on a close. And finally, a channel down pattern was confirmed. These are short-to-intermediate-term bearish developments.
There are several positives, however, as both of the index’s faster moving averages — 20-day and 50-day — are above the slower moving averages. The bull is alive but sleeping with nightmares.
The next support is the August low of 16,334, and MACD is in the bear zone, indicating that it is likely that the August low will be tested.
As mentioned several times last week, the CBOE Volatility Index (VIX), or fear index, is now at levels normally associated with market lows.
Conclusion
Last week’s volatile trading, with two days of negative volume of over 12-to-1, could mark the beginning of a panic sell-off that we have seen in past Octobers. However, on the sentiment front, the AAII bearish percentage has not been so low since Aug. 7, marking the low at Dow 16,334.
Will the market hold or sell off? At this time, I have no strong feeling for the short or intermediate trend. However, the bull market is intact.
Bull or bear, the purpose of this column is not to predict, although, with appropriate technical evidence, I have sometimes provided guidance as to the probability of the occurrence of various technical events.
Rather, this column is meant to educate readers as to how to use technical analysis and its many features in order to help them trade and invest more intelligently. No system, whether technical or fundamental, is perfect, and every investment involves a degree of risk. The shorter the time frame, the higher the risk.
I always read your comments and have observed that the overall level of sophistication of our readers has increased. And that is my goal since, presumably, the more you know, the more profitable your results.
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.
