Stocks Take a Plunge on Global Economic Woes

(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

Good day! The new week got off to a very rough start on Monday. Although we were expecting a price correction into the beginning of the week, the move was much larger than I had originally anticipated. It kicked off in the premarket trade when the index futures formed an Avalanche setup on the 30 minute all sessions time frame into 3:00 AM ET. The selling took the strongest index, the Dow, back into support at Friday's lows before it stalled, but the substantially weaker Nasdaq broke very swiftly through that zone. The selling stalled shortly after 5:30 AM ET, but this was just a temporary reprieve. The indices congested at premarket lows into the opening bell.

The larger-than-average gap, which took place after momentum had slowed on the upside, set up the perfect conditions for one of my favorite gap strategies in the indices. A break in the 15 minute low confirmed that the market would trend lower throughout the morning at least, and the daily setup assured a larger bearish bias into the afternoon as well. Even though the markets slowed their selling pace into the afternoon, triggering a minor Phoenix on a 5 minute time frame, I shied away from attempting reversals due to the larger bias and instead positioned myself for a breakdown into the close. This afternoon continuation took place in the final hour of trade with the 15 minute 20 period simple moving average acting as upside resistance ahead of the breakdown.

Nasdaq Composite ($COMPX)


The extreme decline on Monday has been attributed to overwhelmingly negative news abroad, which was later echoed stateside. Manufacturing data in China, mainland Europe and the U.K. all showed substantial declines. Even though the trend was expected, the extent of the downside was much larger than had been anticipated. This helped kick off the premarket losses. The downside continued following our own Institute for Supply Management's index release which fell to 36.2% in November from a reading of 38.9% in October. This is the lowest reading since 1982 and was nearly twice the decline economists were expecting. Readings of under 50% indicate that the majority of firms polled are reporting diminishing conditions.

Dow Jones Industrial Average ($DJI)


The Dow Jones Industrial Average ($DJI) plunged 679.95 points, or 7.7%, on Monday after last week's record gains. The index ended the session at 8,149. Every single one of the Dow's 30 components closed in negative territory. The financials led the decline with Citigroup (C) down 22.2%, Bank of America (BAC) down 20.92%, J.P. Morgan & Chase (JPM) down 17.50%, and American Express (AXP) down 15.74%. Alcoa Inc. (AA), General Motors (GM), Du Pont (DD), and Caterpillar Inc. (CAT) all also posted double digit percentage losses. McDonald's (MCD) had the best performance out of the 30, but it still closed lower by 4.39%.

The S&P 500 ($SPX) fell 80.06 points, or 8.9%, on Monday and closed at 816.21. It was also led lower by the financials, which fell 17%. These losses were followed by a 13% decline in energy issues, and a 10% decline in materials. Crude oil futures fell 9% on the day, closing under $50 a barrel at $49.28 on the New York Mercantile Exchange. Also making headlines were the yields on the 10-year Treasury bonds (UST10Y), which fell 6.2%. These are used to benchmark mortgage rates, which are at record lows of 2.706%.

The Nasdaq Composite ($COMPX) fell 137.50 points, or 8.9%. It closed at 1,398.07. All of the Nasdaq-100 components also closed in negative territory.

S&P 500 ($SPX)


My outlook this week is now much weaker than it had been heading into the weekend. I don't expect the market to continue to drop sharply to new lows, but the door is now further open for a third low on the daily time frame. In order for the market to bounce decently, it would be ideal for such a low to hit in a couple of weeks. This would round things off at this larger weekly support. It would also mean more choppy trading for several weeks with a greater degree of overlap in price from one day to the next. I am not, however, strongly bearish at this point and would urge greater caution on the short side other than on the intraday time frames right now.