Breakdowns Predict Selling has Not Reached a Climax

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Stocks were hit hard Thursday on lowered growth estimates for China, the resignation of Greece’s prime minister and pause by the Federal Reserve over a pending interest rate hike. The Dow Jones Industrial Average fell over 2% to its lowest close since October 2014, and the S&P 500 closed in the red for the year.

The Shanghai Composite fell 3.4% overnight following a lowered GDP target for China. And the hesitation by the Fed to raise rates makes investors here nervous over the health of the U.S. economy, which is tied to China’s economy.

The normally defensive health care and utility sectors lost 2.3% and 0.6%, respectively. All 10 sectors of the S&P 500 ended in the red.

Crude oil for September delivery rose 0.8% to $41.14 a barrel, but Brent crude fell 1.1%, closing at $46.62 a barrel.

A bright spot in a day of losses was gold. Gold futures rose 2.2% to $1,153.20 an ounce for the biggest advance since late April.

Walt Disney Co (DIS) fell 6.1% while Time Warner Inc (TWX) lost 5% as a result of a downgrade by analysts. And Viacom, Inc. (VIA) lost 5.7% due to a cut in its target price by Deutsche Bank.

Weekly jobless claims showed a slight increase. Existing home sales for July rose to the highest level since February 2007. Leading indicators for July fell 0.2% versus analysts’ expectations of a rise of 0.2%. And the Philly Fed Survey for August rose to 8.3. Analysts had expected an improvement to 7.

The Dow was off 358 points at 16,991, the S&P 500 fell 44 points to 2,036, the Nasdaq was off 142 points at 4,877, and the Russell 2000 was down 30 points at 1,173.

The NYSE Composite’s primary market traded over 900 million shares with total volume of 3.9 billion. The Nasdaq crossed over 2 billion shares. On both major exchanges, decliners outpaced advancers by 5.3-to-1. On the Nasdaq, declining volume exceeded advancing volume by almost 11-to-1. On the NYSE, declining volume led by 7-to-1.

IWM Chart
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Chart Key

The Russell 2000, as represented by the iShares Russell 2000 Index (ETF) (IWM), experienced a failed test of its 200-day moving average, now at $121.61. Then, on Thursday, IWM plunged to its lowest level since the Collins-Bollinger Reversal (CBR) at $114 in early February.

Volume increased on the break, and MACD flashed a fresh sell signal, indicating that the selling is not over. But MACD is oversold, so a bounce is likely.

Nasdaq Chart
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The Nasdaq also broke lower on increased volume, slicing through its support line at 4,905, as well as its 200-day moving average at 4,912. Like the Russell 2000, its immediate target is in the November/February trading zone. A consolidation occurred from November to February with a midpoint at 4,650.

But before that possible support is the March closing low at 4,863, a shallow but viable 14 points below Thursday’s close.

Conclusion

With multiple breakdowns of key moving averages, the tape action is undeniably bearish. And the failed test of the 200-day moving average in IWM, along with a six-month closing low, can’t be ignored. Similar negatives from the Nasdaq predict that the selling has not yet reached climax levels.

But in the near term, the small and mid caps are oversold and a bounce is likely. Short-term support is in sight, and it will be worthwhile to observe the price action as stocks test this first level of serious support after falling from trading patterns that have taken almost all of this year to establish.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-breakdowns-predict-selling-has-not-reached-a-climax/.

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