Tuesday, October 04, 2011

Daily Market Commentary: 5% Loss in Small Caps

A bad day for the indices was made worse by the fact Small Caps suffered most of the selling. With Small Caps leading down it's impossible to see any long term improvement until investment returns to (speculative) growth stocks. There is little reason to be looking to the S&P or Dow to dig the market out of its deepening hole (especially given Large Cap underperformance throughout 2011).

If there comfort for bulls in the short term its perhaps the opportunity for a swing back tomorrow - especially if there is an opening gap down and bearish run over the first hour of trading. Value buyers need not rush in; investors with a long term outlook will look to a minimum price cross above the 50-day MA to offer some semblance of buying into strength. Bottom fishers would be best to wait for the S&P to get beyond 20% from its 200-day MA, although in an earlier post on the Zignals blog. buying could start once the S&P drifted 10% or more away from its 200-day MA.

As for the individual indices, the S&P saw a reversal in the early-stage 'buy' trigger for on-balance-volume, not to mention the distribution day. Any semblance of a 'bear trap' were blown away by Monday's selling. August lows are also broken.

($SPX)
via StockCharts.com

The Nasdaq returned net bearish technically after a (very) brief bullish spell. Volume climbed in distribution and like the S&P it lost August swing low support.

($COMPQ):
via StockCharts.com


Nasdaq Breadth also took a hit as the bearish wedge in the Percentage of Nasdaq Stocks broke to the downside as technicals returned net bearish.

($NAA50R)
via StockCharts.com

But it was left to Small Caps to take all the damage. Technicals remain horrible and the relative strength relationship to the Nasdaq just points to how bad it has been for the Russell 2000 since July.

($RUT)
via StockCharts.com

It might be hard for tomorrow to be as bad as today, so look for narrow trading - even if there is a gap at the open (most likely a gap higher, but Futures will be your guide). This market needs a proper washout and today's action suggests August wasn't it. Time to bite the nails once more...

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Trading Strategy Marketplace Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.

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