The stock market took it on the chin again yesterday, but this week’s decline is still only a blip on the radar screen of the long-term picture of the stock market. Yes, volume did pick-up, so that’s a concern….but given the fact that the composite volume was still below 3bn shares, it’s hard to make too much of this development. We’d also note the breadth on the S&P 500 was only 1.7 to 1 negative…so yesterday’s action was a long way from being a disaster.
That said, we definitely saw some material weakness in the small-cap sector of the marketplace…as the Russell 2000 declined just under 2%. The breadth was 4 to 1 negative on that index. That’s not good, but it’s not horrible. However, volume rose by more than 40% (on the IWM Russell 2000 ETF)...so the action in this index certainly raises some concerns.
On a technical basis, the Russell seems to be forming a textbook “Head & Shoulders” pattern…so if it sees further downside follow-through over going forward, it’s going to raise a big red warning flag. The “neck-line” of that “H&S” pattern comes-in at the 2,150 level (212.00 on the IWM). Therefore, we will be watching these levels VERY closely. Any meaningful break below these levels will signal as very compelling change in trend (especially since the Russell has already broken below its trend-line from the early November lows). (First chart below.)
NFLX reported earnings last night…and the stock is trading down by 8%-10%. This is a classic example of why it is essential to wait for important support/resistance levels to be broken before one reacts to the development. The fact that a resistance level BECOMES a resistance level is because it is one that is difficult to break! (The same is obviously true for support ...