Market Crashes Through 3 Support Lines, What Now?

Stocks opened sharply lower Wednesday following the re-election of President Obama and comments by Mario Draghi who said that the European debt crisis is impacting the German economy. The opening decline accelerated when tech favorites like Apple (NASDAQ:AAPL) broke sharply lower around 11:15 a.m., and the Dow hit its low of the day at the close of European exchanges at 11:30 a.m.

At Wednesday’s close, the Dow Jones Industrial Average was off 313 points at 12,933, the S&P 500 fell 34 points to 1,395, and the Nasdaq was down 75 points at 2,937. The NYSE traded 876 million shares and the Nasdaq crossed 499 million. Decliners outpaced advancers by 4.2-to-1 on the Big Board and by 5.7-to-1 on the Nasdaq. Down volume on the NYSE exceeded up volume by 9.8-to-1.

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There is a lot to show on this chart of the S&P 500. Note the turn down from the blue, 50-day moving average, the break of the solid red, intermediate support line, and then the two lines at 1,418 and 1,403, which were support lines but now are resistance lines.

The break through all of these support lines confirms that the index is in a short-term and intermediate-term decline. The next support for the index is at its 200-day moving average at 1,380 and the longer-term support line drawn from the July 2011 high.

The break below 1,400, its first since Aug. 30, has no technical significance, but is a psychological negative.

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The sector that was impacted by much of the selling Wednesday was the financials. The Financial Select Sector SPDR’s (NYSE:XLF) 3.3% decline broke through the support of its 50-day moving average (blue line) and its intermediate support line (red dashed line). MACD is now on a sell signal and the break lower was from an ascending triangle. All of these factors are extremely bearish for this sector.

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Commentators remarked that the increase in the CBOE Volatility Index (VIX) was uncharacteristically mild compared to the overall market decline. This is no doubt due to shorts taking profits throughout the day. A further spike up would indicate that more broad-based selling could occur.

Conclusion: I noted the more positive footing of the Dow and Nasdaq recently, but Wednesday’s intermediate breakdown of the S&P 500 confirms that the broad market is headed lower.
There are two important support lines within the immediate range of the breakdown: the 200-day moving average at 1,380 and the July 2011 support line at 1,356. If these lines fail to hold, then the entire structure of this year’s price action could be under attack.

The immediate cause of the breakdown was no doubt the re-election of the president, but a more important long-term consequence is his stated desire to enforce new and more strident regulations on the financial sector.

And then there is the looming fiscal cliff, which, in my opinion, was made worse by House Speaker John Boehner’s remarks that came at about 3:45 p.m. The headline from The Wall Street Journal read, “Boehner Open to Deal to Avoid Cliff,” but the market sold off anew following his statement.
Thus, we are again faced with uncertainties of both a domestic and international nature, and neither usually leads to higher stock prices. Sell into rallies until a more positive technical picture emerges.