European financial news was out of the spotlight for over a week, but on Monday, the bad news from across the pond resurfaced and U.S. stocks sank. Spanish yields jumped to 7.4%, and the German weekly news magazine Der Spiegel reported that the IMF said it would not provide further aid to Greece.
The U.S. dollar soared, and after the close, Moody’s lowered its outlook to negative for Germany, the Netherlands, and Luxembourg. At Monday’s close, the Dow Jones Industrial Average was off 101 points at 12,721, the S&P 500 fell 12 points to 1,351, and the Nasdaq was down 35 points at 2,890. The Big Board traded 742 million shares and the Nasdaq crossed 423 million. Decliners were ahead of advancers on the NYSE by 3-to-1 and by almost 4-to-1 on the Nasdaq.
Monday’s rush to buy the dollar produced a new high in the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), but not a new closing high as it nipped the top of its major bull channel. But the announcement by Moody’s of a downgrade of the important northern European countries could ignite another run on the dollar today.
On Monday, I discussed the divergence of the Dow’s stochastic indicator as it made lower highs while the price bars made higher highs, which is a negative. The identical pattern exists on the S&P 500. But the negative interpretation of the pattern is enhanced by a recent sell signal from the indicator.
The next support for the S&P 500 is at the 50-day moving average (blue line) at 1,333, and then the bullish support line at about 1,330.
Conclusion: Monday’s sell-off confirms that the near-term bear trend is still intact. No amount of positive earnings reports appears capable of turning the market higher since the focus has again turned toEurope’s woes.
A normal correction could take the S&P 500 down 5% from last week’s high of 1,377. That puts the downside target at around 1,308 — a slight penetration of the 200-day moving average, now at 1,314. A 61.8% Fibonacci retracement of the June to July advance would equal 1,310.
Investors should buy on a pullback to just below the 200-day moving average, but until then, it is best to keep your powder dry.
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.
