On Friday, stocks fell for the fourth straight session, led lower by a key biotechnology stock that was hit hard on its lowered outlook.
Biogen Inc (BIIB) plummeted 22% to just over $300 after management said sales growth for their flagship multiple sclerosis drug is slowing and cut revenue and earnings forecasts. Capital IQ retained its “buy” rating on the stock but reduced its 12-month target by $77 to $387.
The iShares NASDAQ Biotechnology Index (ETF) (IBB) fell 4.1%. Biotech is a subgroup of the technology sector. Amazon.com, Inc. (AMZN) jumped 9.8% after posting a surprise second-quarter profit. This, however, was not enough to offset the impact of Biogen’s lower-than-expected guidance.
Commodity prices continued their decline as the U.S. dollar strengthened. Gold fell to a nearly five-and-a-half-year low with August futures closing at $1,085.50 an ounce, off 4.1% for the week. But the SPDR Gold Trust (ETF) (GLD) rose 1% on Friday. September crude oil fell as low as $47.96 a barrel, the lowest price in almost four months.
The benchmark 10-year Treasury note edged slightly higher with yields falling to 2.27% from 2.28% on Thursday.
At Friday’s close, the Dow Jones Industrial Average lost 163 points at 17,569, the S&P 500 fell 23 points to 2,080, the Nasdaq was off 58 points at 5,090, and the Russell 2000 was down 19 points at 1,226.
The NYSE’s primary market traded 892 million shares with total volume of 3.8 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 2.7-to-1, and on the Nasdaq, decliners led by over 3-to-1.
For the week, the Dow fell 2.9%, the S&P 500 lost 2.2%, the Nasdaq declined 2.3%, and the Russell 2000 dropped 3.2%.
The Dow Jones Industrial Average closed the week down 518 points, its biggest weekly decline since December.
Monday’s weak attempt at a run at the double-top at 18,289 and 18,312 (closing prices) lacked volume and breadth and led to my change of opinion last week as the industrials plowed through support at their 50-day moving average on higher-than-average volume.
On the surface, the decline looks like it could lead to a nasty sell-off since Friday’s pullback resulted in a MACD sell signal and a violation of the 200-day moving average. But remember that in October the Dow violated its 200-day moving average by over 700 points only to spring back, setting a string of new highs this year.
Selling in the S&P 500 was initially less aggressively last week than in the Dow Jones Industrial Average. But Wednesday through Friday’s higher-than-average down volume and the continuation of Thursday’s fall through the 50-day moving average was a clear negative for the bulls.
The next test for the S&P 500 is at July’s cluster of trading around the 200-day moving average at 2,063. But there is a thick band of support under the 200-day, from 1,991 to about 2,040, that could hold back a rout.
iShares Russell 2000 Index (ETF) (IWM) failed to punch through the resistance at the March-to-April highs at about $126.50 and sold off on high volume.
Bears will be looking for a possible head-and-shoulders top. But the conditions for this pattern to be confirmed are very specific. The neckline at approximately the 200-day moving average ($120.57) must be pierced with a lower close, and volume would have to increase. This is a developing threat though that is worthy of our daily review.
Conclusion
As we enter zones of support remember that institutions have jumped on stocks at those prices because they are at their “value points.” So, in the absence of a dramatic violation, as stocks enter these zones and hit our buy under prices, we should be courageous and stick with those prices.
One of the cornerstones of technical analysis is that humans tend to repeat past activities, and this is what forms support and resistance lines. Or, as William Shakespeare put it in “The Tempest,” “What’s past is prologue.”
Last week’s declines were the result of disappointing earnings rather than global issues, and that is a rational selling response. But what is not so rational is the market’s narrow trading range thus far in 2015. In fact, it’s the narrowest range in the history of the S&P 500. According to Raymond James investment strategist Jeffrey Saut, the S&P 500 set a record by trading in the tiny range of “no more than 3.5% so far this year.”
Saut said that a narrow range in the first half of the year usually leads to a gain in the second half. He gets his info from Bespoke Investment Group, which points to an interesting statistic: “An average gain of 6.1% occurred 62.3% of the time when the S&P 500 was not up or down by more than 6% in the first half of the year.” The second half of the year has started off in the wrong direction, so we shall see.
Thanks to my InvestorPlace colleagues James Brumley and Serge Berger for filling in on short notice last week when my charting software crashed for the first time in 15 years. And especially to James who referred me to TradeStation and its excellent software, and to Jeffrey Corvin at TradeStation, who worked miracles on Saturday to get me into their great charting software, which you see today.
Please see the Trade of the Day for a current list of updated buy under prices on recent recommendations.
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.
