Resolving the previous day's indecision, stocks made a decisive, downward move that resulted in sizeable losses across the board yesterday. Unlike the choppy price action of recent days, a steady, intraday trend (down) persisted from the open to the close. The Dow Jones Industrial Average tumbled 1.2%, the S&P 500 2.0%, and the Nasdaq Composite 2.7%. The small-cap Russell 2000 and S&P Midcap 400 indices plunged 3.6% and 3.3% respectively. Each of the major indices closed at its worst level of the day.
Volume surged across the board, as institutional money rushed for the exit doors. Total volume in the NYSE jumped 20%, while turnover in the Nasdaq similarly rose 17% above the previous day's level. Over the past month, we've been warning about the stock market's bearish price to volume relationship, including a slew of "distribution days" (higher volume losses), and the substantial selling we're now seeing is the outcome of that early warning signal. However, now that the stock market has entered into correction mode, keeping track of the number of "distribution days" is not important. Rather, we will now be on the lookout for signs of institutional accumulation (higher volume gains) that always precede a significant market bottom.
While mutual funds, hedge funds, and pension funds may base their primary investment decisions on fundamental analysis, rather than technical analysis, one technical indicator commonly followed by most institutions is the 50-day MA. As long as the main stock market indexes are trending above their 50-day MA, the intermediate-term trend is considered to favor the bulls. Conversely, the environment is often more favorable to the bears when the major indices are trending below their 50-day MAs. In sideways, range-bound markets, the 50-day MA has less significance because the indexes will frequently cross back and forth through the 50-day line. Yesterday, all the main stock market indexes except the Dow closed below key support of their 50-day moving averages (50-day MA). It was the first time the major indices have breached that pivotal indicator of intermediate-term trends since early July of this year. The breach of the 50-day MA can be seen on the daily chart of the S&P 500 below:
On October 2, the S&P 500 (as well as the other indexes) pulled back to kiss support of its 50-day MA, then bounced neatly off of it the following day. But yesterday, the index actually closed below its 50-day MA (by 0.8%). As the chart above illustrates, the last time this happened was back in late June/early July. From July 2 to 14, the S&P 500 traded below its 50-day MA, causing some traders to believe the uptrend that began four months prior may have been finished.
