Could This Be Another Bear Trap?

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Stocks rose early on Tuesday in what appeared to be a rally that could end a week-long sell-off. But they slumped later in the day in a frustrating session that saw the Dow Jones Industrial Average fall another 1.3% and the S&P 500 lose 1.4%.

The Nasdaq almost reversed, but it too declined. However, it outperformed the other major indices, closing down just 0.4%.

The market’s early rally came about when the People’s Bank of China cut interest rates and lowered its reserve requirement ratio by 50 basis points. And in the United States, the Conference Board reported that consumer confidence improved in August.

Europe’s market rallied and closed higher. The Stoxx Europe 600 advanced 4.2%, the biggest daily gain in four years. Germany’s DAX jumped 5%, the UK’s FTSE 100 climbed 3.1%, and France’s CAC 40 rose 4.1%.

Crude oil for October delivery rose 2.8% to $39.31 a barrel. However, The Wall Street Journal reported some analysts are predicting the next price target for WTI is $35 a barrel.

The euro fell 1.6% against the U.S. dollar, closing at $1.14. And the 10-year Treasury’s yield rose to 2.12% as the benchmark note fell in price.

At Tuesday’s close, the Dow Jones Industrial Average lost 205 points at 15,666, the S&P 500 fell 26 points to 1,868, the Nasdaq was down 20 points at 4,506, and the Russell 2000 was off 8 points at 1,104.

The NYSE Composite’s primary market traded 1.3 billion shares with total volume of 5.1 billion. The Nasdaq crossed 2.6 billion shares. On the Big Board, decliners outpaced advancers by 1.3-to-1, and on the Nasdaq, decliners led by 1.1-to-1.

Dow Jones Industrial Average Chart
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Chart Key

The Dow Jones Industrial Average has had a technical breakdown, and Tuesday’s failure to hold its early advance is not a favorable sign. It broke its 200-day moving average and has signaled a death cross (not labeled).

However, its price action is similar (though more volatile) to the Oct. 16 failure to rally, which sucked the life out of many bulls. A subsequent recovery was quick and decisive when stocks rallied to new highs in less than a month.

SPY Chart
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The chart of SPDR S&P 500 ETF Trust (SPY) shows similar tape action to the Dow, namely the failure in October to rally following a decline. Also note the similarity in volume on the day following the major sell-off when volume dropped and MACD, like Tuesday, was deeply oversold.

Conclusion

The VIX ended the day at 36.02, near its daily high at 38.06. This was well below Monday’s high at 53.29, though, indicating fear decreased on Tuesday. Thus, the overall decline’s momentum, though disappointing, may be losing some punch.

The market’s “correction” meets the textbook definition, already exceeding a pullback of 10%. The bears will claim this is the first leg of a bear market, but that has not yet been proven in that most technicians accept a 20% pullback as the start of a major decline.

Confusion and uncertainty reign. But while others panic, we will evaluate all of the possibilities before jumping ship like the premature cubs of last October. The next three or four days may determine our investment strategy for the remainder of the year.

A failure to reverse up will put this market squarely in the hands of the bears. But bears are good at setting traps, and I can almost hear the clank of the trap echoing from 10 months ago.

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-could-this-be-another-bear-trap/.

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