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Technicals Signal More Downside Risk For The Dow Jones Industrial Average

Market technician Dave Chojnacki of Street One Financial takes an in-depth look at Tuesday’s big market pullback, and updates the important technical levels for investors and traders to focus on as we approach the end of the quarter.

The market opened higher on Tuesday, but quickly reversed to the downside. Equities began to fall rather precipitously, as weakness spread through the major indices.

The averages tried to find support after European markets closed, but the buying dried up, and equities fell through the PM hours. The averages fell through some technical support areas as volume increased.

By the final bell, the SPX had its biggest loss since last September. All three major indices ended with significant losses in the session, as pundits were blaming a possible failure of the House to pass the Health Bill on Thursday for the drop.

At the close, the DJIA was down 1.1%, the SPX fell 1.2%, and the NDX lost 1.5%. Breadth was decidedly negative, 4 to 1, on heavy volume. ROC(10)’s declined, with the NDX joining the DJIA and SPX in negative territory. RSI’s also fell significantly, with the major averages in the mid 40’s to 50.

All three major averages remain with their MACD below signal. This is the one technical indicator which was signaling near term weakness.

The ARMS index ended the day at 1.56, a fairly bearish reading. Equities suffered their biggest losses in months, with all three major averages falling through key technical support levels. The DJIA fell below its 20D-SMA (20888) and its Bollinger Band bottom of 20700. We now look for support at 20624 and its 50D-SMA of 20404. The NDX fell through its 20D-SMA of 5370. The next major support is at 5304. The NDX 50D-SMA is at 5239.

The SPX also ran below its 20D-SMA of 2371 and key support at 2350. The SPX 50D-SMA sits at 2326. IWM (small cap ETF) was down 2.7%, in a sign that smaller companies were hit the hardest.

Utilities (XLU) moved higher, as traders were looking for a place to hide, and they also moved into Gold (GLD). Finally, the VIX spiked 10.2% to 12.50, and as we noted in yesterday’s fund flows recap, volatility-linked ETPs finally saw a bounce off their lows.

Near term support for the NDX is at 5325 and 5315. Near term resistance is at 5350 and 5370. Near term support for the SPX is at 2326 and 2312. Near term resistance is at 2350 and 2371.

Europe is moderately lower in early trade, while U.S. Futures are mixed in the premarket. In terms of major economic data on tap today, we’ll get the FHFA Housing Price Index at 9:00am, Existing Home Sales at 10:00am, and Crude Inventories at 10:30am.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) fell $0.31 (-0.15%) in premarket trading Wednesday. Year-to-date, DIA has gained 4.48%, versus a 4.56% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 74 ETFs in the Large Cap Value ETFs category.

Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, David Chojnacki, does not endorse or recommend any issuer or security mentioned herein.

About the Author: Dave Chojnacki

Dave Chojnacki is the Chief Market Technician at Street One Financial. He provides technical support for the Street One team and also develops individual analysis for Clients as requested.

Dave is a major contributor to the ‘ETF Daily’, a morning newsletter providing clients a daily look at market technicals of the major indices and selected ETF’s. Market trends, support and resistance levels are provided in the daily letter. The Technical portion of the daily can also be found on Seeking Alpha. Mr. Chojnacki has been quoted in a number of industry publications including the Reuters, ETF Trends, Minyanville, Yahoo Financial and Investors.Com.

In addition, Dave assists with desk trading when necessary. He possesses a Series 7 and 63.

Prior to joining Street One, Dave designed and developed I/T Systems for the Insurance and Financial Industries.

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