Watch Support Lines in This Fickle Market

Stocks fell Tuesday on what appeared to be profit-taking following Monday’s buying spree. The pullback took back almost all of the two-session advance and left investors confused as to the market’s direction.

The Nasdaq led the plunge with a 1.6% decline, and the small-cap Russell 2000 was hit for a loss of 1.4%. Both indices led advances earlier this year.

Many attributed the sell-off in mid- and small-cap stocks to a tightening of margin requirements by China. Such a move usually leads to selling to meet margin calls. But other international situations also may have prompted liquidation of stocks, i.e., continuing problems with Greece’s economy and higher interest rates in Germany, which prompted selling in the DAX index.

Here at home, the 10-year U.S. Treasury note fell for the sixth consecutive day and yields rose accordingly, closing up 3 basis points on Tuesday at 2.19%.

The jump in bond yields has impacted utility stocks. The Utilities SPDR (ETF) (NYSEARCA:XLU) fell 2.3% Tuesday and is down 7.2% for the year.

Yields fell across the board Tuesday following an increase in the Institute for Supply Management’s non-manufacturing purchasing managers index. It rose to 57.8 in April from 56.5 in March. Traders surmised that as a result the Federal Reserve may be inclined to increase interest rates more quickly.

Gold futures rose 0.5% to $1,193.20 an ounce. Oil gained 2.5% to $60.40 a barrel, the first close above $60 since December.

At Tuesday’s close, the Dow Jones Industrial Average fell 142 points to 17,928, the S&P 500 lost 25 points at 2,089, the Nasdaq was down 78 points at 4,939, and the Russell 2000 fell 18 points to 1,215.

The NYSE’s primary market traded 793 million shares with total volume of 3.8 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 3.9-to-1, and on the Nasdaq, decliners led by 3-to-1.

IWM Chart
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The small caps, as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), are hanging on by a thread, supported by the thin band from $120 to $121. Below that is the 200-day moving average at about $117.

Increased selling pressure has appeared this week, and that has not helped MACD, which until Tuesday appeared to be arching up.

Dow Jones Transportation Average Chart
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Chart Key

Of all the indices, the Dow Jones Transportation Average looks the worst. This economic indicator closed below its 200-day moving average for the sixth time in a month on Tuesday and drove the MACD indicator to a strong sell signal.

Note the absence of support from my proprietary indicator, the Collins-Bollinger Reversal (CBR), which obliged nicely with twin buys in December and February, and now has issued a single sell signal.


We have had many false starts this year, so I’m not predicting much from this current lack of strength. However, I’d be foolish to ignore the plethora of negative technical signals.

A breakdown could be confirmed today, but perhaps not. This is a fickle market that is not likely to reveal much in the way of its intent. Therefore, we will wait for further confirmation of a decline or just another false breakdown.

Follow the support lines and moving averages in our charts daily for guidance. And as many of the old timers will tell you, “The key to a market’s direction is ultimately told by the volume it keeps.” In other words, does the volume accompany up days or down days? Currently, volume is increasing on down days, which is not a favorable sign.

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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