Last Thursday's surprising reversal off the previous day's lows vanished just as quickly as it came. Stocks gapped higher on Friday's open, but traders immediately sold into strength, setting into motion a steady intraday downtrend. By the closing bell, the major indices had given back most to all of Thursday's gains. The Nasdaq Composite fell 0.5%, the Dow Jones Industrial Average 1.1%, and the S&P 500 1.2%. The small-cap Russell 2000, the only major index that recently failed to rally above its September highs, showed relative weakness by sliding 2.1%. The S&P Midcap 400 lost 1.3%. The main stock market indexes closed in the bottom quarter of their intraday ranges.
Total volume in the Nasdaq increased 6%, while volume in the NYSE was 3% lighter than the previous day's level. The higher volume losses in the Nasdaq technically caused the index to register another "distribution day." However, fully all of the increased turnover could be attributed to the volume surges of Microsoft and Amazon.com, both of which gapped higher on massive volume last Friday. Trading in both exchanges came in right around 50-day average levels. Although volume in the NYSE receded slightly, market internals were firmly negative. Declining volume in the NYSE trounced advancing volume by a margin of nearly 7 to 1. The Nasdaq adv/dec volume ratio was more moderately negative, at 5 to 2.
As we enter the last week of October, the stock market is apparently at a pivotal, near-term inflection point. Both the S&P 500 and Dow Jones Industrial Average finished the week at the convergence point of their 20-day exponential moving averages (EMAs) and last month's prior highs. Below, this is shown on the daily charts of the S&P 500 SPDR (SPY) and Dow Jones DIAMONDS (DIA), popular ETF proxies for the two benchmark indexes:
Presently, SPY and DIA are merely in bullish consolidation patterns, chopping around near their recent highs. However, it's important both indexes hold above last week's lows because a closing break of those lows would cause the indexes to lose support of their 20-day EMAs and their prior highs from September. This would technically cause the short-term trends to reverse to "bearish," though the intermediate-term trends would remain bullish unless the October lows are broken (well below current prices).
As we've mentioned a few times over the past two weeks, one bearish factor of the broad market's recent action has been the relative weakness in the small-cap arena.
