Stocks fell for the fifth time in seven sessions yesterday, with the fear of nuclear fallout in Japan and poor economic results driving investors from stocks. Yesterday’s selling focused on the higher quality stocks as fear that a business slowdown coupled with inflation could have a negative impact on basic industries.
Daily Stock Market News
Dow: -242 points at 11,613
S&P 500: -25 points at 1,257
Nasdaq: -51 points at 2,617
Volume and Breadth
NYSE: 1.46 billion shares traded; decliners ahead 3-to-1
Nasdaq: 740 million shares traded; decliners ahead 2.6-to-1
Futures and Related ETFs
April Crude Oil: +80 cents at $97.98 per barrel; Energy Select Sector SPDR (NYSE: XLE) -$1.20 at $73.95
April Gold: +$3.30 at $1,396.10 per ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU) -4.64 points at 199.57
What the Markets Are Saying
The stock market’s fear gauge, the CBOE Volatility Index (VIX), made headlines yesterday, as it rose over 5 points to 29.4. This is the highest reading on the VIX since July, and some veteran traders said the index is telling us there may be more selling before a solid bottom is put in.
That may be true, but the predictive value of the index is questionable since it moves inversely to daily market moves. Thus, it is no more predictive than following the indices themselves. For example, its last high on July 1, 2010, coincided with the market’s low of the year at Dow 9,622. Followers of the index crowed that it was telling us that stocks were headed lower because of the high reading of 37.58; instead the VIX moved lower and stocks higher for the remainder of the year.
What does an investor do when both the near and intermediate support for each of the indices has broken and volume continues to climb? Yesterday, the selling focused on the big-cap Dow industrials while the Nasdaq, with its list of lower quality and higher volatility stocks, also broke to new lows. Where is the bottom of this rush to sell?
For that answer, we go directly to the charts since they tell us what investors did at prior levels of the indices. For example, the headline for Tuesday Daily Market Outlook was “A Very Bad Sign for the Market.” That sign was Monday’s close below the 50-day moving average of each major index.
Since the break of that support put us into a new intermediate downtrend, I advised that we focus on the next areas of minor support at Dow 11,775, S&P 500 1,275, and Nasdaq 2,700. As expected, they too gave way, and so we now focus on the major December breakout numbers.
These numbers not only resulted in a major upside break, but act as a major support line in the event of a significant reversal. The breakout support line is 11,600 for the Dow, 1,250 for the S&P 500, and 2,625 for the Nasdaq. Yesterday, the Dow closed at 11,613, the S&P at 1,257, and the Nasdaq at 2,617.
OK, we should now be aware that chartwise we are very close to a major support zone, which, if breached, could change the overall long-term trend of the market. But history tells us that major support zones usually hold, and our internal indicators are currently very oversold with readings in the vicinity of last August’s low. Thus, the chances are very high that even though the support numbers may be temporarily breached on an emotional intraday capitulation, we are approaching a major buying opportunity for traders.
With cash in hand, we should now watch for a daily reversal following a deep thrust into these major support zones. Tomorrow, I’ll review this zone in detail and cover our internal indicators. However, this is a very volatile market that could even reverse today. But don’t “jump the gun” and jump into the opening — wait for the signal to buy since it will most likely be very obvious.
For one ETF traders should get ready to buy, see the Trade of the Day.
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.
