Extreme Fear Could Lead to a Reversal

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It was all about the Brexit again on Monday as the broader market got hit with another sell-off. The Dow Jones Industrial Average fell 1.5%, the S&P 500 lost 1.8% and the Nasdaq dropped 2.4%.

Selling continued in Europe as well, with the Stoxx Europe 600 now down more than 10% since the vote.

The British pound sterling fell to a 30-plus-year low, and the yield on 10-year U.K. government bonds dipped below 1% for the first time. The yield on the U.S. 10-year Treasury note fell to a four-year low, closing at 1.46%.

The financial sector was hit hard again, down 2.9%. Barclays PLC (ADR) (BCS) plunged 20.9% following downgrades by a number of research firms and a downgrade of British debt by Standard and Poor’s. Other notable decliners included Bank of New York Mellon Corp (BK) and Metlife Inc (MET), down 5.6% and 7.4%, respectively. Dow component American Express Company (AXP) fell almost 4%, and Deutsche Bank AG (USA) (DB) lost 5.8%.

The energy sector fell 3.1% as oil dropped 2.7% to $46.33 a barrel. Exxon Mobil Corporation (XOM) lost 0.6% and Chevron Corporation (CVX) declined 1.5%.

Gold, the consummate store of the fearful, continued to rally, up 0.2% to $1,322.50 an ounce.

At Monday’s close, the Dow Jones Industrial Average fell 261 points to 17,140, the S&P 500 was down 37 points to 2,001, the Nasdaq lost 114 points at 4,594, and the Russell 2000 was down 38 points at 1,090.

The NYSE Composite’s primary exchange traded 1.3 billion shares with total volume of 5.4 billion. The Nasdaq crossed 2.6 billion shares. On the Big Board, decliners outpaced advancers by 4.2-to-1, and on the Nasdaq, decliners led by 5.7-to-1. But most importantly, downside volume on the Nasdaq expanded to over 12-to-1. Block trades on the NYSE fell to 6,764 from 8,495 on Friday.

Nasdaq Chart
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Chart Key

In early June, the Nasdaq fell from its April high, and last week, just prior to the Brexit, the index failed to hold its 50-day moving average. My proprietary Collins-Bollinger Reversal (CBR) indicator flashed a false buy signal on June 16.

The Nasdaq collapsed on Friday, gapping down through its 50- and 200-day moving averages on the same day. And, as noted, the most important feature of the breakdown was that downside volume overcame upside volume by more than 12-to-1 — a clear sign of danger.

Conclusion

The stock market’s technical clues have been difficult to discern for most of this year. This is because typical methods of fundamental and technical analysis like P/E ratios, growth estimates, trendlines, moving averages and chart patterns have been overcome by political and global news events.

Where is the stock market headed for the remainder of the year? Ask the politicians in Brussels and D.C. Until the markets calm down and we are able to evaluate them in a more normal way, no amount of analysis can be reasonably predictive.

However, in the wake of so much uncertainty, Jeff Saut of Raymond James had it right when he suggested traders “take a breath, sit back, and analyze the facts… do not panic.”

Panic gripped the markets on Friday and Monday, forcing margin calls and dire predictions of more to come. With the pendulum of fear having swung far to one side, perhaps we will see a meaningful reversal this afternoon.

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/2016/06/daily-market-outlook-extreme-fear-lead-reversal/.

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