If technical support levels break in a vacuum, do they make a noise?
Last night, we noted how major averages traded below key near-term technical support intraday, but managed to claw back. Today, there was no clawing, save for the sound of investors trying to escape, as major averages closed decidedly below key support levels amid another low-volume session.
closed down 0.6% to 1067.67, ending at its session low and noticeably below support in the 1075-77 area. The
also closed near its session low, losing 1.7% to 1624.37 and violating perceived support at 1650. The
shed 1% to 487.60, breaching support at 490, as
Dow Jones Industrial Average
, which began the day below the psychologically significant 10,000 level, fell 0.6% to 9923.04, just above its (declining) 200-day moving average at 9893.24.
Broader averages suffered from weakness in
, which fell 3.9% on news the
Securities & Exchange Commission
has launched a preliminary investigation into the oil-service giant's accounting. Additionally,
fell 6.8% after upping second-quarter estimates but declining to provide guidance beyond that, while
fell 23% after warning about its earnings.
Those specific issues, along with general concerns about possible terrorist threats -- today's rumor was about the Empire State Building being targeted -- an escalation of tensions between India and Pakistan, and renewed attacks on Israeli civilians, continued to weigh on investors' collective psyche. Concurrently, renewed weakness in the dollar re-emerged -- particularly vs. the euro, which hit a 14-month high of $0.9360 -- as did strength in gold, which closed at $325.50 per ounce after trading above $326 intraday. (However, strength in the metal failed to aid gold-related shares, which were hit by a Goldman Sachs downgrade, as
discussed earlier; the Philadelphia Stock Exchange Gold & Silver Index fell 3.2%.)
The terrorism/global instability issues and accompanying weak-dollar/strong-gold trends have been evident for some time and contributed to another day of decidedly muted volume.
New York Stock Exchange
trading, 1.1 billion shares traded -- up from Friday's and Tuesday's levels -- but still 16% below the 3-month average daily volume, according to
. In over-the-counter trading, 1.2 billion shares traded, also up from prior days but below the average daily volume this year of around 1.7 billion.
Which brings us back to the question posed above: Does the absence of heavy volume change the significance of the technical breakdowns?
"The fact you had light volume probably lessens the importance," said Richard Dickson, technical analyst at Hilliard Lyons. "But the way it's looking now, you have to say the May lows are what we test next," given the aforementioned breach of support levels as well as last week's lows.
Specifically, those May lows are 9807 for the Dow, 1049 for the S&P 500, and 1560 for the Comp.
"People are frustrated right now, frustrated and pessimistic about the overall outlook," Dickson said. "It's been since the middle of April since we had any decent highs and people are asking: 'When are we going to finally see something other than up a couple of days and then down and dull?' "
The answer remains in doubt, but a growing number of market veterans are suggesting the current environment is reminiscent of the period from 1975 to 1982. After a vicious bear market in 1973-74, stocks went nowhere fast for several years, grinding down the collective will of many investors in the process.
Sound familiar? Well, consider that if a repeat of that scenario is occurring, we've only just begun.
The Masked Man
With the Nasdaq selling off the past three trading days many readers have inquired as to the current thinking of Trader X. (For those just tuning in, Trader X is an anonymous source who's expressed steadfast optimism about tech stocks recently, as reported
Trader X has been traveling since Friday (
) but reiterated a bullish view when reached Tuesday afternoon, as I reported in
Trader X suggested the market was just being "whipped around" on low volume, and actually argued the breaking of key technical support levels for the S&P and Dow yesterday was "very bullish." On recent occasions, "they take the numbers out and they turn out to be false breaks," he said, predicting "we should start a big rally" today given the spike yesterday in the 1-day Arms Index. (Today, the 1-day Arms fell 5.1% to 1.60, which is still a relatively high level.)
Obviously, that rally forecast proved faulty, in contrast to some of Trader X's previous short-term predictions.
I was unable to reach Trader X today, but doubt the action changed his point of view. Yesterday, he said his tech bullishness wouldn't be wrong "until
breaks down on big volume
falls below $22 on big volume."
Today, Cisco fell 4.5% on 74% of its average-daily volume, according to Baseline, while AMAT shed 4.2% to $23.10 on 78% of its average-daily volume.
Trader X continues to "buy the dips," although such opportunities seem to be presenting themselves with increasing frequency.
That said, as much as some readers are put off by Trader X's incredible cockiness (which is obnoxious) an equal number are
that he is wrong. Recent action seemingly justifies that view, but the anecdotal evidence (i.e., reader email) suggests investors are as bearish on tech now as they were bullish on it in March 2000 -- or at least darned near close to it. For that reason, at least, I'm not willing to totally dismiss Trader X's bullishness, although I wholly disagree with his theory that a final, absolute bottom is in place, be it the Comp's May 6 intraday low of 1560.29 or its Sept. 21 low of 1387.06.
Which brings me to the point: Don't confuse the message with the messenger.
Like many readers, I find Trader X intriguing, albeit less so as the market falters. However, I also continue to quote other sources with decidedly different points of view. Just
yesterday, I quoted Woody Dorsey of
, as forecasting the markets as being on the cusp of a capitulation-type selloff that will continue into the first week of June. The "interim trading low" that emerges will pave the way for an extended and sizable summer rally beginning in July, he suggested, but one that ultimately proves to be another bear-market dalliance.
Dorsey's outlook certainly seems to be holding sway and is more in tune with my own, for those curious to know.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.