An overbought condition in high-momentum stocks led to a broad sell-off Tuesday despite a strong opening. Light volume persisted throughout the day.
It was pointed out by one trader that despite the Dow being up over 30 points during the session, volatility is often high in such a situation, “so it doesn’t take much to move the market.”
Positive economic news in the form of new home sales for May that came in well ahead of forecasts and a consumer confidence report that rendered the highest reading since 2008 accounted for the strong opening.
Energy and industrials were hit hardest while defensive sectors like utilities and health care gained. But even the iShares Nasdaq Biotechnology (IBB), which jumped more than 2% shortly after the opening, closed up just 1%. Gold futures gained 0.2% to settle at $1,320.90 an ounce.
At Tuesday’s close, the Dow Jones Industrial Average was down 119 points at 16,818, the S&P 500 fell 13 points to 1,950, and the Nasdaq lost 18 points at 4,350. The NYSE’s primary market traded just 635 million shares with total volume of 3.1 billion shares. The Nasdaq traded total volume of 2 billion shares. On the Big Board, decliners outpaced advancers by 1.7-to-1, and on the Nasdaq, decliners were ahead by 2.4-to-1.
Following its October 2013 low, the Russell 2000 accelerated its bull channel and held the channel for much of last year. In April, the small-cap index decisively penetrated the support line of the channel and broke its 50-day and 200-day moving averages.
A recovery appeared when the Russell reversed in May and June, overcoming the breakdown and renewing its advance. In short order, the index sliced back up through its 200- and 50-day moving averages and appeared capable of overcoming the overhead from resistance at 1,200 to 1,212.80 with little to stop it.
But instead of penetrating the resistance line that defined last year’s support, it failed at that crucial point on Tuesday, issuing a bearish key reversal at 1,193.
Conclusion: Some technicians will claim that the bearish key reversal has little meaning. We saw at least four of them last year. However, none occurred at a key resistance line while the smart money scurried to the safety of utilities and gold.
Savvy traders and investors don’t dive into the market with new cash when a bearish key reversal hangs over the market like a black cloud. And bearish key reversals appeared on not only the Russell, but on the Dow industrials and Nasdaq as well.
We may be on the sidelines for just a few days, but until the market clears the resistance on the key indices, it is prudent to pack the family into your car and head to the beach.
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.