Time to Take the Bears’ Side

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Stocks were hard hit Tuesday. The selling was attributed to the Federal Reserve’s failure to raise interest rates last week, concerns about China’s growth and a scandal at Volkswagen AG (ADR) (VLKAY) in which the company allegedly cheated on U.S. emissions tests.

The Dow Jones Industrial Average fell 1.1%, the S&P 500 was off 1.2%, and the Nasdaq Composite fell 1.5%.

However, European stocks suffered their worst day in a month. The Stoxx Europe 600 closed 3.1% lower as VW’s problems threatened to have a broad impact on the automaker’s suppliers. Volkswagen’s stock plunged 19.8% taking the stock to a 34.7% loss in two days.

The company said it would establish a 6.5 billion euro reserve in anticipation of fines expected to be levied by the U.S. Department of Justice. The Wall Street Journal reported the investigation could widen to include the entire auto industry. Ford Motor Company (F) fell 2.8% and General Motors Company (GM) was down 2%.

Biotechnology stocks continued Monday’s sell-off, taking back more of the past year’s huge gains. The iShares NASDAQ Biotechnology Index (ETF) (IBB) fell 1.5%.

The euro lost 0.6% against the U.S. dollar, closing at $1.1129. Gold was down 0.7% to $1,125 an ounce. And October light, sweet crude oil ended the day at $45.83 a barrel, off 1.8%. The decline in oil prices was blamed on worries over future Chinese growth since the country is the second largest consumer of oil in the world.

At Tuesday’s close, the Dow Jones Industrial Average was off 180 points at 16,330, the S&P 500 fell 24 points to 1,943, the Nasdaq lost 72 points at 4,757, and the Russell 2000 was down 18 points at 1,143.

The NYSE Composite’s primary exchange traded over 900 million shares with total volume of 3.8 billion. The Nasdaq crossed over 2 billion shares. On the Big Board, decliners outpaced advancers by 3.8-to-1, and on the Nasdaq, decliners led by 3.3-to-1.

Nasdaq Composite
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Chart Key

The Nasdaq plunged from its rising wedge pattern and found immediate support at the December support zone of roughly 4,800 to 4,550. High volume for the past three days accompanied the fall, and MACD turned lower but has not yet issued a sell signal.

The late rally on Tuesday could be an indication of some short-covering and may even continue this morning. The first resistance to a rally is at Monday’s close of 4,829.

Conclusion

As noted previously, the breakdown from an ascending wedge is most commonly seen at market tops.

Coupled with other negative indicators, including the breakdown of the S&P 500’s 17-month moving average chart, we have no choice but to be very cautious.

Dow Theory has not yet flashed a bear market signal. But that may be a moot point since by the time the signal is given the Dow industrials could have fallen another 620-plus points, or 4% from Monday’s close.

The plan now should be simply to sell into rallies and launch defensive strategies. Aggressive traders should enter bearish option positions and short high-P/E stocks as well as those with a limited fundamental outlook. (See the Trade of the Day for one such stock.)

It is always possible that the clouds will part by Halloween, but bearish strategies could result in a lot of treats before then.

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/2015/09/daily-market-outlook-time-to-take-the-bears-side/.

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