Stocks suffered a rough session Tuesday as the IMF cut its forecast for global growth and cited the potential for a new recession. The S&P 500 fell 1% and NASDAQ 1.5%; however today’s drop could not be placed on Apple but a much broader spectrum of selling. Let’s start with the NASDAQ chart today as it showcases the major issue. As we’ve been speaking of the past few days the potential for a bearish “head and shoulders” formation was growing. You have your left shoulders (left circle), the head (middle circle), and right shoulder (right circle). Where the lows of the right and left shoulder are is called a neckline. When these necklines are broken, you normally have issues in the intermediate term.
Today also marked another “distribution day” per the Investor Business Daily framework - this looks to be the fourth in a few weeks.
A distribution day is defined as the loss of more than 0.2% by a major index — the Nasdaq, the NYSE composite or the S&P 500 — as volume ticks higher than the prior session’s total.
A few are ok but when they begin to pile up it’s another caution flag. Of course nothing is so simple, and the bulls still have the fact that the slope of the 50 and 200 day moving averages is upward. Also, even if the bearish scenario plays out nothing happens in a straight line and with the NASDAQ the weakest of the major indexes it is fast approaching an oversold condition.
The S&P 500 continues to look better than the NASDAQ as the Apple effect is not as prevalent but this was the first clear break of the 20 day moving average on a closing basis in quite a while. We can see the index is nearing the lower end of it’s ascending channel.
After the bell, aluminum company Alcoa (AA) beat but major oil company Chevron (CVX) warned as did Cummins Engine (CMI) which has major exposure to the Indian and Chinese markets. This continues to the issue of global slowdown affecting corporate profits, which the market has seemingly brushed off for months.
Remember the big surge in Netflix (NFLX) yesterday on an upgrade? Well today it was downgraded by another firm and sunk 10% – shows you how this stock is in weak hands and as I wrote yesterday much of the gain in the stock had been short covering.
Chinese search engine Baidu (BIDU) also was hit hard on a downgrade as was Intel (INTC).
Moving over to Apple (AAPL) see below how the stock bounced perfectly off levels we had been highlighting – the stock was down well over 1% this morning before bouncing in the afternoon. With earnings in a few weeks the technical picture could change but this is definitely not hearty action for the most important stock in the market. In fact, this was a classic head and shoulders breakdown – so you can see why they can be dangerous.
Last, check out this neat graph by CNNMoney that shows the growth of the world’s largest economies between 2001 thru projections in 2017. It is definitely amazing to see the strides China has made in half a generation.