It Ain’t Looking Pretty

by Sam Collins | May 21, 2010 6:33 am


The major stock indices plunged into a full correction Wednesday on the worst day for the market since early 2009.  A correction is defined as more than a 10% decline from its high. The S&P 500 closed at 11.97% from its high on April 23, marking the first official correction since the bottom made in March 2009.

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Uncertainty over Europe’s economic woes that many fear could spread back to us combined with the news that a Wall Street Reform Bill will go to a floor vote had much to do with the sell-off.  Additionally the wild runs on the euro and the dollar, prohibition of naked short selling in Germany, and a threat that the prohibition would spread to other countries were also contributing factors to the already negative sentiment.  Economic indicators for April showing a 0.1% decline vs. an expected gain of 0.2%, along with an increase in both initial jobless claims and continuing claims, brought in sellers of stocks did not help brighten the outlook.

It seems that the only bright spot of the day was the Philly Fed’s Index which for May at 21.4 was slightly higher than expected. 

At the close the Dow Jones Industrial Average was off 376 points to 10,068, the S&P 500 fell 43 points to 1,072, and Nasdaq was down 94 points, closing at 2,204.  Nasdaq had the biggest percentage decline for the day, off 4.11%.  The NYSE traded 2.1 billion shares with decliners over advancers by over 10-to-1.  Nasdaq crossed over 1 billion shares and decliners there were ahead by over 11-to-1.

Crude Oil for July delivery (new spot contract) closed at $70.80 a barrel, off $1.68.  The Amex Energy SPDR (XLE) fell $2.44 to $52.16.  June Gold settled at $1,188.60 an ounce, off $4.50, and the PHLX Gold/Silver Index (XAU) closed at $164.83, down $7.71.

What the Markets Are Saying

The stock markets were massacred yesterday with broad-based selling that could have much broader implications than its companion “Glitch Day” just two weeks ago today.  The sell-off back then (seems like a year ago) was quickly followed by a rebound generated by bargain hunters  who thought that the glitch resulted in an opportunity.

But yesterday’s high volume rout was not a mistake, and on top of that there was no intraday rebound to sooth stockholders’ nerves.  No, yesterday’s panic was the “real article” with high volume liquidations that not only lasted for the entire day but accelerated into the close.

Your DMO warned last week that the failure of the major indices on four occasions to break through the 50-day moving average was a bad sign.  As recently as this Monday I said, “Technically last week’s rally failed at its most crucial and most visible line of resistance—the 50-day moving average.”  And, “Investors should be worried since it is almost never a good sign to have the leading sector of stocks hit this hard—it usually points to a more serious correction.”

The most significant result of yesterday’s selling was the clear violation of the 200-day moving averages on the major indices.  Along with that is a penetration of the 20-week moving average at S&P 1,092. 

But moving average lines are not the most important indicator.  What is most important is that yesterday’s closing lows are lower than the prior closing lows—that is,  lower than the closing lows of  May 7th.  The market’s violation of those numbers establishes that an intermediate change of trend has occurred—and it is down.

Today the chances are strong that the markets will open lower continuing yesterday’s decline with a direct attack on the February 4th closing low of the S&P 500 at 1,063 and its intraday low of 1,045.  And if the S&P closes below 1,045, a quick test of the major support line at 1,030 is even possible.

What action should you take:  If you did not sell and can’t sleep I would wait for the first strong rebound and sell into strength—then sell until you can sleep.  As for new money?  A horrific amount of technical damage has been done to major patterns and high volatility and lower prices are likely.  You should have plenty of time in the next weeks and months to put new money to work.

FYI—Just to add more volatility, May options expire today.

Today’s Trading Landscape

Earnings to be reported before the opening include: Ann Taylor, Graham, Hibbett Sporting, and Tech Data.

Economic reports due: There are no economic reports due.

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