Sam Collins

The Market Will Tell Us What to Do Next

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Stocks were caught in a sharp sell-off yesterday, despite better-than-expected earnings from a number of companies. But investors seemed more interested in what will be than what was, and to them the future looked not as bright as it did just a few days ago. The selling really took off when a report showed that new home sales fell 3.6% in September.

Stocks ended near the session's lows with nine of the 10 S&P sectors showing a loss.

Financial stocks were hurt the worst, falling 3.2%. But Visa (V) posted a gain of 3.61% after reporting better-than-expected earnings the night before. 

But the U.S. dollar gained ground for the fifth consecutive session and the CRB Commodity Index fell 2%, with energy and gold closing lower. Leading energy stocks like Exxon Mobil (XOM) fell 1.43%, and Apache (APA) was hit for a loss of 4.39%.

Telecom stocks beat the rest of the list by advancing 1.8%, with Verizon (VZ) up 2.6% and AT&T (T) up 1.9%. Verizon was helped by a favorable report from Moody's Investors Service.

At the close, the Dow Jones Industrial Average (DJI) was off 119 points to 9,762, the S&P 500 (SPX) fell 21 points to 1,043, and the Nasdaq (NASD) was down 56 points to 2,060. 

Decliners were far ahead of advancers on both exchanges -- both at a ratio of 8-to-1. The NYSE traded 1.7 billion shares, and the Nasdaq traded 849 million.

December crude oil fell $2.09 to $77.46 a barrel, and the Energy Select Sector SPDR (XLE) fell $1.91 to $55.94, both a result of an unexpected rise in U.S. inventories of gasoline and a higher dollar. 

December gold fell $4.90 to $1,030 an ounce. The PHLX Gold/Silver Index (XAU) fell $8.31 to $154.92.

What the Markets Are Saying

Since the Oct. 21 intraday high on the S&P 500, the market has been drubbed in five of those six trading days for a total loss of 5.3%. And even if it appears to be just part of the back-and-forth that we've seen since late April, which has defined the limits of the bull channel, this pullback feels much more intense. 

Yesterday, the broad market had a ratio of 8 sellers for every buyer, and volume up was at 36% and volume down at 64%.

On the Nasdaq, it was much worse with the up volume at just 8% and down volume at 92% -- and that represents some very heavy selling.  

But the Relative Strength Index (RSI) closed at 41.30, the lowest reading since July 9, and almost connects the three prior lows with the downward sloping line mentioned yesterday. That could indicate that a trading bottom is pending.

Considering just these factors, we could conclude that a mild early morning round of romping bears could end with an upside reversal. But the S&P 500 closed slightly below both its supporting trend line and the 50-day moving average. And the Nasdaq crushed the 50-day moving average.

Our signals today will depend on the close. If we continue lower, then I'd be looking for a pullback to at least 1,020 on the S&P. But if we get an upside reversal, then it's time to jump on your favorite trading stocks and run them to the top of the bull channel again.

The tops of the channel for each index are S&P 500 1,110 (maybe even 1,120) and Dow 10,200. 

Since many stocks broke down through double- and triple-bottoms, a reversal up or a lower close would be significant. The market will tell us what to do next.