Sell-off Reaches Panic Proportions

by Sam Collins | February 4, 2014 2:47 am

On Monday, the market opened lower and then plunged as nervous investors offloaded stocks that they had held in January. Emerging markets appeared to be the underlying problem, but a number of reports suggest that the U.S. economy may not be as strong as previously estimated.

The Dow Jones Industrial Average is down 7.3% so far this year. And the index fell 2.1% on Monday. The S&P 500 is down 5.8% for the year, and the Nasdaq has fallen 4.3% this year.

The ISM report triggered an early sell-off when it showed that manufacturers cut orders and reduced production in January. The index fell to 51.3, its lowest reading since May, when 56 was expected. The report, combined with weak jobs numbers for December and the Federal Reserve’s continued tapering, triggered investor liquidations.

At Monday’s close, the Dow Jones Industrial Average was off 326 points at 15,373, the S&P 500 fell 41 points to 1,742, and the Nasdaq dropped 107 points to 3,997. The NYSE traded total volume of 4.7 billion shares, and the Nasdaq crossed 2.6 billion shares. Decliners outpaced advancers on the Big Board by 5.6-to-1, and on the Nasdaq, decliners reached 6.2-to-1.

SPX Chart
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Chart Key[1]

The violation of the important support line at 1,775 has serious implications. Most importantly, the next support line is the October breakout line at 1,730. If violated, we must focus our sights on the 200-day moving average at 1,707 and the intraday target of 1,700.

Conclusion: With very high volume and strong negative breadth, it is likely that the sell-off has finally reached “panic” proportions. VIX closed at 21.44, which matches the highs for VIX of October and June. Thus, it is possible that institutional buying could enter the market soon.

Support at 1,707 (200-day moving average) to 1,730 is significant, but if the market cannot hold there, then the reversals at 1,647 and 1,627 come into play.

There has already been significant technical damage, and it is likely that there is more to come. But panic is a plus for the investor as long as the long-term trend remains intact. Investors should review their buy lists and prepare to grab some bargains. But traders should remain on the short-term sell side with stop-loss orders on all short sales in order to protect against an upside reversal.

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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