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Tread Lightly in This Fragile Market

Key reversal day for Russell 2000 is a sign of overall market weakness


The Dow Jones Industrial Average rose to a four-year high yesterday, following a strong ISM Manufacturing Index report. And China reported a strong manufacturing reading while the UK had lower-than-expected numbers.

The market sprang forward on the strong economic reports, but over half of the gains were lost in the afternoon. And the tape was replete with many downside reversals, especially among small- and mid-cap stocks.

At the close, the Dow had gained 66 points at 13,279, the S&P 500 rose 8 points to 1,406, and the Nasdaq gained 4 points at 3,050. Volume on the NYSE totaled 771 million shares, and 484 million shares traded on the Nasdaq. Advancers were ahead of decliners on the Big Board by 2-to-1, but decliners were ahead on the Nasdaq by a fraction.

With the European markets and others around the globe celebrating May Day, it is difficult to evaluate the low-volume advance of yesterday and the new four-year high in the Dow industrials. It should shake the bulls’ confidence to lose so much of the early gain, which was solely due to good news.

RUT Chart
Click to EnlargeTrade of the Day Chart Key

The Russell 2000 comprises the bottom 2,000 of the Russell 3000 and is the best indicator of the small- to mid-cap stocks. Its afternoon sell-off left it with a decline after making an intraday high that exceeded its highest price in a month. This created a chart signal called a “key reversal day.” Some technicians put great weight on days like that, and I consider it a sign of overall market weakness, especially when combined with a sell-off in the broad market and a close below its 50-day moving average.

Today, we will have the Europeans back in the market, and before the opening we should have economic reports from the continent that will no doubt have an impact on our stock market.

Opinion: The technical outlook is very fragile. Sell into strength.

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.

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