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U.S. Equities Took a Beating But Keep on Ticking

NEW YORK (TheStreet) -- Last week's U.S. equities selloff led investors to fear markets had reached a tipping point. But this week, upcoming support levels in both iShares Russell 2000 Index (IWM) and SPDR Dow Jones Industrial Average (DIA) and underlying fundamental strength could revive confidence. Currently the three major indices are up by less than 1%.

After accelerating close to 10% since early April, SPDR S&P 500 (SPY) dropped over 2% last week, recording its worst weekly loss since June 2012. Equities started the week with fairly muted trade, and even showed strength on Wednesday as U.S. economic growth outperformed expectations in the second quarter, while first-quarter growth was revised higher.

Losses took hold of the market on Thursday and Friday, however, as disappointing employment figures, negative headlines in European financials, and more sanctions imposed on Russia led to selling pressure in equities and increased volatility in iPath S&P 500 VIX ST Futures ETN (VXX).

Cyclical stocks in the Dow index -- JPMorgan Chase (JPM), Goldman Sachs Group (GS) and American Express (AXP) -- mostly led markets lower.

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Although analysts speculate U.S. equities have gone over a cliff and could correct lower by 10% or more over the next few months, both price action and fundamental factors do not support those claims. Falling prices in the Dow Jones Industrial Average and Russell 2000 are quickly approaching support levels that should lead to buying pressure.

The Dow Industrial Exchange Traded Fund declined last week from 170, ending close to 164. Major support levels reside at 163, where prices consolidated for a few months prior to a break higher in April.

Basic principles of technical analysis state that areas that once acted as resistance will act as support in the future, after that resistance is broken. Assuming this holds true, the Dow index should pause near 163.

Similarly, small-cap stocks in the Russell 2000 index have underperformed large cap indexes the past few months. Although the index has shown relative weakness, it too is approaching price levels near 110 that have held up as support over the past year.

Alongside price support, fundamental factors underlying the market do not signal panic selling is imminent. The economy is gaining momentum in what has been a very gradual recovery. Labor market and economic activity are not robust, but jobs have been added and growth has accelerated more than anticipated the past few months.

Meanwhile, interest rates are expected to rise over the next year, but are coming off of record low levels. Even if the 10-year Treasury yield were to rise another 100 to 200 basis points, it would still be historically very low.

The market is ripe for a pullback, but it is tough to justify that the bottom will simply fall out underneath equities. With strong price support and a recovering economy, prices should trade either sideways or move higher over the next few weeks.

IWM Chart
IWM data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

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