All Eyes on the Dow After Tuesday’s Selloff

A close below 16,334 would be big trouble for the bulls

Stocks ended lower again yesterday following Monday’s tepid rally. The decline was attributed to comments by a Polish official who warned of a more aggressive Russia and its threat to Ukraine and Europe.

The Dow Industrials fell 0.84% and the S&P 500 lost 0.97%, with all 10 sectors ending in the red. Small-cap stocks outperformed big-caps, but the Russell 2000 still dropped 0.3%.

Along with the political problems overseas, economic data had a negative impact, as well: China reported a disappointing HSBC Services PMI report, which fell to its lowest level on record, and the PMI reading from the eurozone fell unexpectedly to 54.2 from 54.4.

Major retailer Target (TGT) fell 4.4% after management’s forecast of lower earnings. But Coach (COH) jumped 4.3% on better-than-expected earnings and revenues. Boeing (BA), a Dow component, rallied 1.1% following a steady decline that began on July 24. Several other Dow stocks were hit hard: Intel (INTC) fell 3% and Chevron (CVX) was off 2.5%. Exxon Mobil (XOM) fell 1.9%.

Some money ran to U.S. Treasuries, and the 10-year note ended with its yield at 2.48% as buyers ran the price of bonds higher late in the afternoon.

At the close the Dow Jones Industrial Average fell 139.81 points to 16,429.47, the S&P 500 lost 18.78 points to close at 1920.21, and Nasdaq fell 31.05 to 4352.83. The Russell 2000 lost 3.26 at 1121.56. The NYSE traded total volume of 3.5 billion shares, and Nasdaq crossed 1.9 billion shares. Decliners outpaced advancers on the Big Board by 2.5-to-1, and on Nasdaq decliners were ahead by 1.4-to-1.

Dow Jones Industrial Average

Another triple-digit decline on Tuesday put the important Dow industrials in a very narrow and dangerous squeeze. Support now rests at the conjunction of the intermediate trend line and the 200-day moving average at 16,334, and resistance at the 2013 high of 16,588. MACD is in the bear zone and somewhat oversold, while our momentum indicator (not shown) is clearly oversold.

Conclusion: While there are many interesting technical features that we could discuss, at present the most critical chart is that of the Dow Jones Industrial Average. The index is now trading in a narrow zone of just 254 points, as noted above. What makes this zone so important is that although the 200-day has been violated several times, the trend line has not.

Yesterday’s selloff picked up steam late in the day following the Polish minister’s comment, which caused enormous unwarranted fear by the public. The selling appeared to be on light volume, indicating a lack of conviction on the part of the “smart money.” Thus it is possible that in the absence of more “bad news” and with a close above the 2013 high at 16,588, we could see the bottom of the current correction.

However, if the selling continues with a close under the support indicated, then a full-fledged correction of 10% to 15% is likely.

Chart Key

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