No Evidence of a Bottom Being Put in Place

by Sam Collins | April 11, 2014 2:06 am

High-growth technology, biotech and financial stocks led a broad sell-off Thursday that resulted in the biggest one-day decline for the Nasdaq Composite in almost two and a half years. The index fell 3.1%.

And the selling wasn’t confined to the Nasdaq. The S&P 500 was off 2.1%, with all 10 of its sectors registering a loss. The Dow Jones Industrial Average fell 1.6% — its biggest loss since Feb. 3.

Stocks opened lower following disappointing data from China, which reported a trade surplus of $7.71 billion for March. This renewed concerns about the strength of the Chinese economy voiced earlier this month by analysts.

Here in the U.S., initial claims fell to 300,000, the lowest point since May 2007, and below estimates of 325,000. The Treasury Budget for March showed a deficit of $36.9 billion versus expectations of $36 billion.

At Thursday’s close, the Dow Jones Industrial Average was off 267 points at 16,170, the S&P 500 fell 39 points to 1,833, and the Nasdaq plunged 130 points to 4,054. The NYSE’s primary market traded 786 million shares with total volume of 3.8 billion shares. The Nasdaq crossed 2.3 billion shares.

On the Big Board, decliners outpaced advancers by 3.4-to-1, and on the Nasdaq, the ratio of decliners to advancers was 6.3-to-1. More importantly, downside volume on the Nasdaq exceeded upside volume by a whopping 14.5-to-1.

SPX Chart
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Chart Key[1]

The S&P 500 closed below its support line at 1,850, as well as the important 50-day moving average at 1,843.

Here is a summary of support levels: The next support is at the lower band at 1,813. A full Fibonacci correction of 61.8% of the advance from the February low to the April high gives a target of 1,799. Finally, there’s the 200-day moving average at 1,760, which, if penetrated, would change the long-term trend. 

Nasdaq Chart
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The Nasdaq has violated technical support at 4,243, its 50-day moving average at 4,223, and the support line at 4,080. Its MACD is in deep bearish territory. The next important support is the line at 3,990, and finally, its 200-day moving average at 3,933.

Conclusion: The high-P/E stocks launched a deep correction beginning with the first penetration of the Nasdaq’s 50-day moving average. Since then, downside volume has accelerated, and Thursday downside volume on the Nasdaq exceeded 14-to-1. Anything above 10-to-1 is usually associated with the beginning of a bear market.

Currently, both the Russell 2000 and Nasdaq are in short- and intermediate- term downtrends. Their long-term trend is in jeopardy. A penetration of the Nasdaq’s February closing low at 3,990 and its 200-day moving average, now at 3,933, would turn the long-term trend to down.

With significant support for the S&P 500 at 1,850 now broken, the index is in a near-term and intermediate-term downtrend. Thus far, this fall is within the normal boundaries of a mild “correction” and could even fall to the Fibonacci target of 1,799, which would be a 4.9% decline from its closing high. 

But all indices are in jeopardy of being dragged lower by the high-technology sell-off that initially had just a negative impact on the Nasdaq and Russell 2000. Margin calls will no doubt trigger more selling, so investors should stand aside and traders should revert to either cash or bearish strategies. My guess is that the broad market, as represented by the S&P 500, will find a bottom at around 1,800, which is the 61.8% Fibonacci number. 

But the near and intermediate trends are now down, and with few exceptions, this is not the time to take major long-term positions. There is no evidence of even the beginnings of a bottoming process. 

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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