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Head-and-Shoulders Breakdown Signals More Declines

Although most charts have a bearish tone, one is of particular technical interest

Stocks were hit hard on Wednesday as a broad market decline took all 10 ten sectors of the S&P 500 down, with the index off 1.6%. The Dow Jones Industrial Average fell 1.5% for its biggest loss since Oct. 9, the Nasdaq lost 1.7%, and the Russell 2000 was off 2.2%.

The sharp decline was attributed to an unexpectedly large U.S. oil glut. Oversupply concerns led to a 4.5% drop to $60.94 a barrel, its lowest level since July 2009.

The slide in crude added to misgivings concerning the overall condition of the global economy. The materials sector fell 2.1%, as worries over steelmakers sent the Market Vectors Steel ETF (SLX) down 3.4%.

Oil stocks got slammed with Chevron Corporation (CVX) down 2%, Exxon Mobil Corporation (XOM) off 3% and ConocoPhillips (COP) down 2.2%. Smaller producers suffered even more. Triangle Petroleum Corporation (TPLM) fell 8.6%, and Comstock Resources Inc (CRK) lost 10.8%. A new energy ETF, Goldman Sachs MLP Energy Renaissance Fund (GER), issued in late September, fell 5.5%.

Airlines, which benefit from low fuel costs, rose. JetBlue Airways Corporation (JBLU) gained 0.7%, Southwest Airlines Co (LUV) gained 1.8%, and United Continental Holdings Inc (UAL) was up 1.9%. Many analysts believe lower fuel prices will generally benefit the economy.

There were no major economic reports to influence the market. But retail sales and producer prices come later in the week. And the Federal Reserve’s policy statement is due on Dec. 17.

At Wednesday’s close, the Dow Jones Industrial Average fell 268 points to 17,533, the S&P 500 was down 34 points to 2,026, the Nasdaq lost 82 points at 4,684, and the Russell 2000 fell 26 points to 1,162.

The NYSE’s primary market traded 914 million shares with total volume of 4 billion, and the Nasdaq crossed 1.8 billion shares. On both major exchanges, decliners outpaced advancers by 4.6-to-1. More important, declining volume outpaced advancing volume on the NYSE by more than 15-to-1.

Although most charts had a bearish tone Wednesday, one chart says it all, that of the SPDR S&P MidCap 400 ETF (MDY).

MDY Chart
Click to Enlarge

Chart Key

The mid caps broke from a clearly defined head-and-shoulders top through a support line at $258.

Since the top of the head is 8 points higher than the neckline, the target for the break is $250. That may not seem like much, but an 8-point drop would pierce both the 50-day and 200-day moving averages, which could trigger a more dramatic decline.


It is time to lighten up on small- and mid-cap stocks, especially ones in which you have a profit or those that you were going to sell for a loss this year.

From a technician’s point of view, there are several negative indicators that cannot be ignored. These include the head-and-shoulders top on MDY and the overwhelming negative volume on the NYSE of over 15-to-1. Volume of over 8-to-1 is considered significant.

However, this signal is of a near-to-intermediate-term nature. Long-term investors should continue to hold their positions since only the short and intermediate trends have turned down. We will most likely enter 2015 while still in a bull market.

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.

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