Stocks sold off sharply on the opening Tuesday, resulting from fear that the chaos in Greece would lead to a major overhaul of the Europe Union. France’s election of a socialist president contributed to the discontent and technical breakdowns of major indices. The Dow Jones Industrial Average fell to its fifth straight loss despite an afternoon rally that took back almost three-quarters of the early losses. The only sectors that were up yesterday were utilities and health care, both considered defensive.
At the close, the Dow was off 76 points to 12,932, the S&P 500 lost 6 points at 1,364, and the Nasdaq fell 11 points to 2,946. Volume on the Big Board totaled 901 million shares and the Nasdaq’s volume was 553 million shares. Decliners were ahead of advancers by 1.6-to-1 on the NYSE and by just 1.1-to-1 on the Nasdaq.
The Dow’s sell-off from a triple-top resulted in several concerns. First, triple-tops tend to be more difficult to overcome than other types of topping formations, requiring much time and volume to reverse. Next, the slicing through of the 50-day moving average is nasty in that it sets up the index for a test of the support line at the closing of 12,716 made on April 10. A further move against that number would reverse the intermediate trend to down.
While the Dow represents the large-cap sector, the Russell 2000 measures the movement of small-cap and mid-cap stocks. This index, which led the advance in December through January, now has more risk built into it than other indices following the “key reversal day” (KRD) noted on the chart.
It appears to be forming a head-and-shoulders top — a very reliable formation with precise targets when its neckline is broken. The high was made in March at 836, and its neckline is at 784, which gives a target of 732.
Tuesday, it broke the neckline with a low of 781, but recovered and closed above it. The late rally may result in a recovery back to 800-plus but the index is vulnerable and should be closely monitored.
Conclusion: Since the indices are somewhat oversold, I expected a bounce back Tuesday, and we did see some significant buying in the afternoon. After the close, Walt Disney (NYSE:DIS) hit the tape with earnings up 21% at 63 cents per share versus an expected 58 cents. The result from the entertainment giant could provide some ammo for the bulls to keep yesterday’s late rally going, but if that occurs, traders should sell into it. We most likely have yet to see the lows of the current trends.
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.
