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A Powerful Selloff Generates Negative Technical Patterns

David Becker
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A Powerful Selloff Generates Negative Technical Patterns

The S&P 500 SPDRS closed below its 50-day line Thursday and the volume was significant, which is a negative combination. The Nasdaq Composite Index followed suit, which is a bad sign for technology bulls. Their daily MACD lines remain decidedly negative. The Nasdaq loss of -1.9% made it Thursday’s weakest index. That is because the technology sector was the day’s weakest sector with a loss of -2.19%. The Technology Sector SPDR (XLK) fell below its 50-day line as well. The biggest contributor to the tech selling came from Apple (NASDAQ:AAPL) which fell -3.8% to end below its 50-day line as well. Apple is the Nasdaq’s biggest stock.

The Russell 2000 Small Cap Index fell -1.6% to close just above its early August intra-day low at 1107. A negative pattern of “lower highs” has already formed between July and early September. A close below 1107 would form an even more negative pattern of “lower lows”. That would turn its trend lower and lead to an even more important test of its May low. A small cap breakdown would be bad for the rest of the market as well.

Most bond prices rose Thursday expect for high yield (junk) bonds. The iBoxx High Yield Corporate Bond iShares (HYG) fell to a two month low and ending below its 200-day average. That is the first time that has happened since June of 2013 during the “taper tantrum”. The recent drop in prices comes after its August rally stopped below its June high, which set up a potential “double top” reversal pattern. Junk bonds are more closely correlated to stocks than bonds. That is why their recent weakness is another negative warning for the stock market.

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