Small Caps Look Set to Free Fall

by Sam Collins | August 28, 2013 2:26 am

Stocks suffered a broad sell-off Tuesday, falling to a two-month low on fears that U.S. military forces would become involved in the Syrian war. Those worries were heightened by uncertainty regarding future Fed policy on further stimulus and who will become the next Federal Reserve chairman.

At the close, the Dow Jones Industrial Average was off 170 points at 14,776, the S&P 500 fell 26 points to 1,630, and the Nasdaq lost 79 points at 3,579. The NYSE traded 682 million shares and the Nasdaq crossed 390 million. Decliners led advancers on both exchanges by 1.2-to-1.

RUT Chart
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The Russell 2000 small-cap index was hit with a decline of 2.41% Tuesday — more than twice the 1.14% decline of the Dow, and even more than the Nasdaq’s 2.16% decline.

It gapped down on the opening after failing to penetrate the resistance line at 1,042 and continued to fall through its 50-day moving average at 1,024, closing at its low of the day — a decidedly weak performance. The close rested on the upper line of a band of support at 980 to 1,013. MACD turned strongly negative.

Conclusion: Since the small- and mid-cap stocks led other groups on the way up, it is natural that they should become the subject of most of the selling. A break on the Russell 2000 below Tuesday’s low of 1,013 would likely result in a free fall into the support zone at 980 to 1,013.

This free fall could be exacerbated by the low seasonal volume coupled with the current Syrian crisis. Thus, traders should focus on a break in this index with appropriate short-term bearish strategies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

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