Tuesday marked the seventh straight day of declines for the Dow Jones Industrial Average, the most consecutive down days for the blue-chip index since August 2015. European instability, especially in the banking sector, and a weak stimulus package from Japan were blamed in part for the selling.
The Q2 earnings season was considered by most economists to be a positive surprise, but now that it is almost over, many believe that P/E multiples are stretched to a point that a correction is due. However, others consider the technical aspects of the market to be sound and think July’s trend will reassert itself. Lately, the stock market has been tracking oil prices, though, and WTI crude fell 1.4% on Tuesday to close below $40 a barrel.
Consumer discretionary was the worst-performing sector, off 1.5%, due mainly to weakness in auto stocks. Ford Motor Company (NYSE:F) fell 4.3% and General Motors Company (NYSE:GM) lost 4.4%. Airline stocks also had a bad day, with U.S. Global Jets ETF (NYSEARCA:JETS) falling 4.1%. Delta Air Lines, Inc. (NYSE:DAL), one of the day’s worst performers, lost 7.8%, after reporting passenger revenue per available seat mile declined 7% in July.
Biotechnology stocks led again with the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) up 0.2%. Excitement surrounding a mega deal with Biogen Inc (NASDAQ:BIIB) being the subject of a possible acquisition by either Allergan plc (NYSE:AGN) or Merck & Co., Inc. (NYSE:MRK) caused most stocks in the group to advance.
At Tuesday’s close, the Dow Jones Industrial Average fell 91 points to 18,314, the S&P 500 declined 14 points to 2,157, the Nasdaq was hit with a 46-point loss at 5,138, and the Russell 2000 was down 17 points at 1,202.
The NYSE Composite’s primary exchange traded 943 million shares with total volume of 3.8 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 2.9-to-1, and on the Nasdaq, decliners led by 3-to-1. Blocks on the NYSE increased to 5,384 from 4,830 on Monday.
The daily chart of the S&P 500 clearly indicates that the tight flag formation is no longer “tight.” There is minor support at the 20-day moving average at 2,156, just 1 point below Tuesday’s close. But the first support of significance is at the June closing high at 2,119, and then the support line at 2,100. Between those two support levels is the 50-day moving average, now at 2,113 which may also act as support on a minor pullback.
The weekly chart of the S&P 500 dating back to September 2014 shows a strong breakout that easily jumped to new highs in March, blowing through the resistance (now support) line at 2,157. If that doesn’t hold, the next support is at the Q2 closing high at 2,126.
This chart shows that the long-term trend is bullish, so pullbacks should be treated as buying opportunities.
Conclusion
The bull market is still in force despite some rattled nerves Tuesday caused by lower oil prices. This apprehension is understandable, especially in light of the possibility that the S&P 500’s flag formation may be in the process of breaking.
Speaking of the “tight flag,” as long as the pattern remains tight — i.e., within a very restricted range and doesn’t wander to the right, as this one has — it is bullish. I hate to see any formation take a long time to develop since it usually means that momentum has been lost and the formation will wither on the vine. The current flag is barely flying, and an increase in selling and the MACD indicator are not supportive of a near-term break to new highs.
However, as I said, pullbacks should be treated as buying opportunities, especially for investors. Traders should track the support at Tuesday’s 2,147.58 low in the S&P 500 for clues as to the near-term direction of the market.
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.
