On Tuesday, stocks took their worst drubbing in months due to concerns over Europe’s inability to rein in their economic problems, China’s moves to control inflation, and the Fed’s failed attempts to drive down interest rates.

U.S. stocks opened sharply lower following an overnight sell-off in China where the Shanghai Composite plunged 4%. In just three days, Chinese stocks have fallen 8%, but they had risen 33% in four months, so much of the pullback may be attributed to profit-taking. The selling in China also drove European stocks lower, with the UK’s FTSE 100 falling 2.4%.

The Dow Jones Industrials fell more than 200 points, with 28 of its 30 stocks lower. The two that made gains were Wal-Mart Stores Inc. (NYSE: WMT) and The Home Depot, Inc. (NYSE: HD). Retail stocks still posted a 0.6% loss, but all of the S&P’s sectors closed lower, with the retail sector suffering the least amount of damage.

There was little in the way of corporate news to offset the sharp declines, and two economic reports failed to inspire investors’ confidence. The October producer price index increased 0.4%, which was below the 0.8% expected by economists. And October industrial production was expected to increase by 0.3%, but instead was unchanged.

Treasury prices rose with the 10-year note’s yield falling to 2.84% and the 30-year bond’s yield slipping to 4.27%. The euro fell to a seven-week low of $1.35.

At the close, the Dow Jones Industrial Average fell 200 points at 11,024, the S&P 500 lost 19 points at 1,178, and the Nasdaq was hit with a 44-point loss at 2,470. The NYSE traded 1.35 billion shares with decliners ahead of advancers by over 7-to-1. On the Nasdaq, 655 million shares were exchanged and decliners were ahead by 4.5-to-1.

Crude oil for December delivery fell $2.52 to $82.34 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell $1.17, closing at $61.45. December gold fell $30.10 to settle at $1,228.40 an ounce as investors sold the metal and ran to the U.S. dollar, renouncing inflation as the major threat in the face of the declining European economies. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 6.11 points to 206.73.

What the Markets Are Saying

Sellers drove the S&P 500 through the initial support at its 20-day moving average to the next broad support at 1,174 in a single day. As we saw on other occasions this year when the bulls’ confidence was shaken, this broad index plunged in hours from the top to the bottom of a broad support zone that in former times might have taken weeks.

A 200-point sell-off in the Dow with negative breadth at 7-to-1 is a powerful response to the bulls who thought that greener pastures would arrive before Thanksgiving. But now, unless they can marshal their forces and turn prices north, they will be faced with a serious number of technical problems.

Yesterday’s selling turned the near-term trend down and the intermediate trend to neutral. If buyers can stop the bleeding at this level the sell-off will have terminated at the bottom of the 1,174 – 1,210 support zone for a successful test of major importance. But if prices continue to slide into the next support zone at 1,150 to 1,175, and below the 50-day moving average at 1,165, then the next line is at the September breakout at 1,130, and after that the 1,040 – 1130 (six months of torture) support area. 

News from China and Europe triggered the current break, and what is driven down by news can also be reversed by news. I’ve expressed the need for a correction for several weeks and noted many times the overbought condition of the market and the dangers of a sudden correction that could be triggered by a sudden news event. Therefore, our readers should not have been surprised by yesterday’s pounding.

Traders and investors alike must now focus on the ability of the market to stabilize at the current level. Many of the stocks on our buy list are either close to or below our buy under price, and the precious metals group has seen a good deal of the selling due to what could be a bottom in the U.S. dollar. But the group is getting close to major support, and I suggest that those who felt they’ve “missed the boat” may soon get a great opportunity to jump aboard. (See the Trade of the Day.)

But, again, patience not “irrational exuberance” is the key to investment success. Stand back and let the market bring some extreme bargains to your portfolio, and then pounce. 

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.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.