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Expect Unusually Heavy Selling Pressure

VIX indicating traders hedging against further market decline


On Monday, stocks fell again in the face of negative headlines from Europe. Even an upbeat domestic manufacturing report and better-than-expected housing numbers didn’t make up for the new uncertainties in Greece, Spain and Cyprus.

An EU summit is to be held at the end of this week. But instead of calming the situation, tensions increased as Germany is rumored to be taking more of a hard line with its European neighbors to the south.

At Monday’s close, the Dow Jones Industrial Average was off 138 points at 12,503, the S&P 500 fell 21 points to 1,314, and the Nasdaq lost 56 points at 2,836. The NYSE traded 752 million shares and the Nasdaq crossed 414 million. On the Big Board, decliners exceeded advancers by 3.3-to-1, and on the Nasdaq, decliners were ahead by 2.9-to-1. On the NYSE declining volume accounted for almost 90% of shares traded.

VIX Chart
Click to EnlargeTrade of the Day Chart Key

The CBOE Volatility Index (VIX) or “fear index” gapped up yesterday and held above 20. The VIX is indicating that puts are being bought in large numbers to hedge against a further market decline.

Note the buy signal from its stochastic along with the gap up and the attack on the 50-day moving average — all telling us that stocks will probably continue to be under unusually heavy selling pressure this week.

NYSE Chart
Click to Enlarge

The NYSE Composite Index includes all of the stocks traded on the Big Board. Thus, it is often a more reliable tool for studying the strength of broad market trends. Note that unlike the Dow and S&P 500, this index failed to exceed May 2011’s high and is therefore in a long-term bear market.

Nearer term it failed to hold above its 50-day moving average in April and again in June, and is threatening to break below the minor support line at 7,465. The stochastic issued a sell signal last week. The support line at 7,225 is critical — a failure there could result in a collapse to the October closing low at about 6,570, a breakdown of over 12% from Monday’s close.

SPX Chart
Click to Enlarge

The broad-based S&P 500 closed Monday exactly on the minor support line at 1,313 after reversing down from its 50-day moving average. The next support rests at its 200-day moving average at 1,295. The stochastic issued a sell signal on Thursday.

Conclusion: The S&P 500’s 200-day moving average at 1,295 may soon be tested. And under that is the June 4 low at 1,266, which, if penetrated, would turn the broad market down.

Stocks will undoubtedly be impacted by the Supreme Court’s decision on Obamacare, which is expected on Thursday. Since the Court’s decision could have a wide and diverse impact on stocks, it is prudent to stand aside for several days until the decision is rendered.

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.

Article printed from InvestorPlace Media,

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