Today's trading action in the NASDAQ 100 and Russell 2000 indicate that investors have started to retrench and that a significant market correction may be underway.
Unlike the Dow, which was up slightly at noon EDT, the NASDAQ 1000 is down about 1.1 per cent. It likely would be down even further were it not for Apple, which is holding steady after the company announced very strong (4 million units) pre-orders for its new iPhone6 smartphones. Meanwhile, Yahoo is holding steady on word of strong demand for the Alibaba IPO and a potential increase in the deal price.
On the other hand, some of the leading momentum stocks of recent years are taking a hit, led by Tesla Motors which is down 9.95 per cent.
Overall this action indicates that traders are retrenching and starting to move out of momentum markets. The NASDAQ has broken down through 4,055 today while its RSI has fallen below 50 to confirm a downturn in momentum and signal that a market correction may have begun.
Initial support may appear in a zone between 3,950, a 23 per cent retracement of the advance which started in April and the 4,000 round number, an area which also contains the 50-day moving average.
Today's trading action in the Russell 2000, indicates that the market advance of recent months may be nearing exhaustion and increasingly vulnerable to a correction. While the large-cap Dow is steady at noon EDT, the broader Russell 2000 is down 1.2 per cent.
This action indicates that the troops are no longer following the generals higher and in fact, small-caps are starting to retreat. This means that the breadth of the rally is shrinking, with bullish interest contained to a few big names while the broader market is starting to crumble.
Since the beginning of the year, the Russell has been trading in a channel between 1,080 and 1,215. The July failure to break out of this channel completed a bearish double top while a lower high in the RSI indicated weakening upward momentum.
Earlier this month, the index peaked at a lower high near 1,190 and has now fallen toward 1,150. With RSI falling under 50 to signal a downturn in momentum a decline to retest 1,105 Fibonacci support or 1,080 channel support appears possible in coming sessions.