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Stay on the Sidelines Until Market’s Conundrum is Resolved

The Dow is struggling with a narrow range, and the trend could go either way


Small-cap stocks led the market lower Tuesday with the Russell 2000 falling 0.8%. The Dow industrials lost 0.1% and the S&P 500 fell 0.2%.

But share volume was the fifth lowest of the year, and in such an environment, small caps are usually more volatile than big caps. Geopolitical news also makes them more susceptible to wide fluctuations.

The euro zone ZEW Economic Sentiment fell to 23.7 from 48.1, and Germany’s ZEW Economic Sentiment dropped to 8.6 from 27.1.

In addition to overseas’ worries, there is the ever-present threat of an end to the Federal Reserve’s easy-money policy.

Job openings for June showed a slight improvement, increasing to 4.671 million from 4.577 million, the highest level since February 2001.

At Tuesday’s close, the Dow Jones Industrial Average fell 9 points to 16,561, the S&P 500 lost 3 points at 1,934, the Nasdaq was off 12 points at 4,389, and the Russell 2000 fell 9 points to 1,133. The NYSE’s primary exchange traded a below-average 531 million shares with total volume of 2.6 billion shares, while the Nasdaq traded just 1.6 billion shares. On the Big Board, decliners outpaced advancers by 1.4-to-1, and on the Nasdaq, decliners led by over 2-to-1.

DJI Chart
Click to Enlarge

Chart Key

As noted in the Daily Market Outlook on Aug. 6 and Aug. 11, the Dow has found its narrow range to be a problem. The range is bounded by its 200-day moving average, now at 16,360, in conjunction with an intermediate trendline at about the same level forming support, and resistance at the 2013 high of 16,588.


Under normal conditions, a roaring bull market should have no problem with a mere 228-point range on the Dow industrials. However, this range coupled with the Russell’s failure to successfully attack its 200-day moving average at 1,145 (see Russell 2000 chart) has brought these indices to a critical point.

Despite both indices’ MACDs apparent willingness to turn positive, if prices fail, the MACDs will turn down. Volume is light and breadth is thin, which means that the trend could go either way. So again, we should stay on the sidelines until this conundrum is resolved.

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.

Article printed from InvestorPlace Media,

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