Stocks took a nosedive yesterday when the European Central Bank failed to commit to a program of purchasing government bonds. And the bank’s chief, Mario Draghi, added that it was unlikely that any further loans would be made to the International Monetary Fund.
The market had previously rallied on the expectation of bond purchases following comments that Draghi made last week. The ECB also announced a rate cut of 0.25% instead of an expected cut of 0.5% amid a divided vote on the board, which created even more uncertainty.
So, despite a better-than-expectedU.S.initial jobless claims report and earnings, the focus was again upon a weakening economic picture inEurope. As a result, the Dow Jones Industrial Average closed lower by 1.63%, the S&P 500 was down 2.11%, and the Nasdaq lost 1.99%. The NYSE volume totaled 929 million shares with 514 million traded on the Nasdaq. Decliners exceeded advancers by over 6-to-1 on both exchanges.
We’ve been waiting for several weeks for results from the much-hyped meeting of European bankers. Anticipation of a strong statement of support was shattered, and the hopes that at least a temporary solution could be found to the crisis failed to materialize.
And so yesterday the markets expressed the disappointment with a dramatic reversal from the S&P 500’s bearish resistance line and 200-day moving average. This is a significant technical signal with the implication of either much lower prices or a long, tortuous period of more back-and-forth trading within the broad zone from 1,100 to 1,300.
The immediate support for the S&P 500 is at the 1,220 line and the 50-day moving average just 2 points lower. A break of that support area will no doubt drive stocks to the 1,150 area.
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While the S&P 500 has turned down from several significant resistance lines, the Dow industrials and transports reacted with what could be ominous double-top formations. The double-top of the industrials would be confirmed with a break below 11,650, and for the transports, that number is 4,685. The top, if confirmed, would probably result in a test of the October lows.
Conclusion: Yesterday’s tape action was extremely negative. Despite an expected response from Europe’s politicians that yesterday’s announcements are not quite so onerous, only an immediate upside reversal that takes out the highs of the Dow indices’ double-tops could reverse this pattern. That reaction is unlikely, so we must conclude that the stock market has finally told us the direction of its next move — and it is lower. Bear market strategies are back in full force.
What’s more, the European’s have “kicked the can down the road” again. This morning’s reaction rally could provide an excellent opportunity to enter bearish strategies or offload lagging stocks.
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.
