Stocks quoted in this article:
Despite a better-than-expected new home sales number and a Dallas Fed index that came in ahead of expectations, markets are selling off sharply today. The Dow is currently off 170 points with the S&P 500 Index (SPX) down over 1.5%. Much of the selloff can be attributed to European weakness: London's FTSE 100 is down 3.8%, the Spanish IBEX 35 has shed 3.6%, the French CAC 40 is off 2.6%, and the German DAX has declined 2.2%. This drop has come on the heels of cautious comments by German Prime Minister, Angela Merkel, stating that she does not support many of the measures that have been discussed to backstop the European debt markets.
Much of the reason why markets are reacting so unfavorably to this news is because of the EU Summit that takes place later this week. Merkel's cautious comments have thrown a wet blanket on what many were expecting to be a very positive meeting. Over the weekend, George Soros came out and said that if Europe doesn't solve anything this week, it could be fatal. The timing of Merkel's comments couldn't have been worse.
Taking a technical look at the S&P 500, I would expect a test of at least the 25% Fibonacci retracement of the April highs and June lows at 1,305, and most likely a test of the 200-day moving average (white trendline) could be expected. From there, the next support level is between the June lows of 1,266 and the year-to-date breakeven level of 1,257. The recent inverse head and shoulders pattern that appeared to signal a strong move higher has proven to be a false move for now, and near-term weakness is very probable.
Despite today's weakness, stay alert for any new potential news that could help these markets rip higher. Until then, trading on a very short time frame and/or in a hedged fashion is advised. Focus on sectors that are outperforming, and steer clear of those that aren't working.