Where Will This Sell-off Stop?

by Sam Collins | August 16, 2013 2:07 am

Disappointing outlooks from both Cisco’s (CSCO[1]) and Wal-Mart’s (WMT[2]) management sent stocks into a tailspin Thursday.

Despite the bad news from the two giants, the Federal Reserve Bank of New York’s Empire State Manufacturing Survey showed the employment index rising to 10.84 from 3.26 in July. This news confirmed to some investors that a tapering in the Fed’s $85-billion-a-month bond-buying plan was inevitable. Oddly, both bad news and good news were treated with pessimism by the market as prices for stocks and bonds plunged for the worst day in eight weeks.

At the close, the Dow Jones Industrial Average was hit with a decline of 225 points, ending at 15,112, the S&P 500 fell 24 points to 1,661, and the Nasdaq dropped 63 points to 3,606. The NYSE traded 720 million shares and the Nasdaq crossed 406 million. On the Big Board, decliners outnumbered advancers by almost 4.5-to-1, and on Nasdaq decliners were ahead by over 4-to-1.

SPX Chart
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Chart Key[3]

VIX Chart
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The CBOE Volatility Index (VIX) popped 13%. Michael Ashbaugh, in his daily report, noted that one-day spikes of over 10% usually result in a shallow pullback, indicating that most of the real damage to stocks has already been done.

Conclusion: During Thursday’s sell-off the Dow broke through its 50-day moving average, the Nasdaq gapped down through its 20-day moving average, and the S&P 500 broke down through the neckline at 1,676 of a shallow head-and-shoulders top with a low close to its 50-day moving average at 1,657.

My warnings of problems with the short-term technical outlook for stocks began on Aug. 6[4]: “For now both traders and investors should stand aside unless some very unusual bargain presents itself. And at this level traders should consider some profit-taking.”

And every day since then I’ve voiced concern that the technical aspects of the market were set for a minor correction.

And on Wednesday[5] I said, “The McClellan oscillator is negative, the Relative Strength Index (RSI) has failed to confirm the recent new highs of the Dow S&P 500, Nasdaq and Russell 2000, and the NYSE Advance/Decline Line showed fewer stocks making new highs when the major indices recently hit new highs.”

I’ve stated as clearly as possible my opinion that the stock market is in near-term trouble.

Where will the sell-off stop? Here are targets for a quick sell-off: S&P 500 1,642, then 1,573 (June closing low); Dow 14,660 (June closing low); and Nasdaq 3,320 (June closing low) after penetrating its 50-day moving average at 3,533.

In other words, look for a 3%-7% decline with the high-tech and small- and mid-cap stocks hurt the most. It is time for defensive strategies since a pullback of this extent could be followed by a period of consolidation that may last for several months.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  2. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  3. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  4. began on Aug. 6: https://investorplace.com/2013/08/daily-stock-market-news-be-careful-with-highfliers-in-this-market
  5. on Wednesday: https://investorplace.com/2013/08/daily-stock-market-news-is-the-market-about-to-go-down-in-flames/
  6. click here: http://www.bloomberg.com/apps/ecal?c=US
  7. click here: http://www.bloomberg.com/markets/economic-calendar/

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