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Stocks Break Down, and are poised to Move Lower

David Becker
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Stocks Break Down, and are poised to Move Lower

The breakdown in small cap stocks has generated potential damage to the rest of the market indices and could continue to put pressure on the U.S. equity markets. That situation has gotten even worse. The Russell 2000 Small Cap Index has declined below its August low. In so doing, it has also established a negative pattern of lower highs and lower lows since the start of July. That puts the Russell in position to threaten even more important chart support along its February, May lows.

Midcap stocks are also threatening chart support. The S&P 400 Mid Cap Index slipped below its 200-day moving average for the first time in two years, and threatening to break its early August low. A close below that previous low would complete a bearish double top reversal pattern formed during July and August. That would also have a negative impact on large cap stocks.

Large cap stocks are starting to weaken as well. The S&P 500 Index traded well below its 50-day average, and traded at the lowest level since mid-August. At the very least, a further decline is likely to its early August intra-day low 1904 which would also result in a test of its 200-day moving average. That would represent a modest correction of 5-6%.

It is important that the SPX find support in that area to prevent a more serious breakdown. The 14-day RSI line has fallen below the 50-line after failing to confirm the recent high in the SPX. Daily MACD lines have also turned down, which reflects negative momentum for the large cap index. Those short-term divergences take on more meaning after the market has completed a five-wave advance, which it’s done since the start of the year.

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