Investors finally gave up on Washington and sold-off stocks on trading volume. The Dow lost 160-points with the carnage being spread through all of the major indices. The technical damage to some charts has been done, and only an imminent snap-back rally would repair it.
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We probably shouldn't over analyze here since we know the catalyst and it could reverse with one quick deal. But when damage is done to the charts, the market does not always respond in kind to the news. The reason is, if the market was in good shape, support would probably hold. Perhaps this breakdown is a prophesy of something bigger such as another down grade to the U.S. debt? I don't know.
The S&P 500 (SPY) fell through the 50-day EMA with authority on high volume, clearly triggered by the absolute breakdown in Washington over the shutdown, and potentially the debt ceiling negotiations as there seems seems to be no hope for a deal. That probably won't be the case, but right now it feels that way and investors reacted.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The 50-day EMA is one level of support that was broken and a warning sign. Even worse, the long-term support was also penetrated, almost with ease, once the selling started. As I mentioned the other day, sometimes these breakdowns trigger stops to be hit and there's somewhat of a capitulation, and when volume spikes like this it could mean a turning point. The problem is, the technical damage has been done and it could mean rallies need to be sold rather than buying dips. It may be too early to say, but that the way we're leaning. We'll have to see what investors do when we get the inevitable snap-back rally. Will they sell it, or jump on it?
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq, which has been leading on the upside, fell to the 50-day EMA and the prior August high, which is a nice clean place for support. Obviously this is an important juncture for the Nasdaq and the bull market.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Bonds were non-factor yesterday as both the long and intermediate bond funds were basically flat.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
This market will likely rebound if and when there is a deal made in Washington. The question now is whether the character of the market has changed where we will see selling of the rallies instead of buying the dips and eventual new highs as we have become accustomed to in 2013. Volume was sharply higher as "big money" joined in the selling. Perhaps this is a contrarian bullish signal but the technical damage is clear on some charts, while the Nasdaq and small caps need to hold their 50-day EMAs.
In today's TSP Talk Plus report we'll look at a few more charts in including the ARMS Index and the market leaders. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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