SMALL AND MIDCAP STOCKS LEAD LARGE CAPS LOWER -- THE S&P 500 IS IN DANGER OF CLOSING BELOW ITS 50-DAY AVERAGE -- RISING DOLLAR PUSHES ENERGY SECTOR INTO ANOTHER TEST OF 200-DAY AVERAGE
S&P SMALL AND MIDCAP INDEXES FAIL TEST OF 50-DAY AVERAGE... The pullback in stocks that started yesterday is continuing today. And it's being led down by smaller stocks. Chart 1 shows the S&P 600 Small Cap Index ($SML) falling decisively back its blue 50-day average. That's a negative sign for it and the rest of the market because smaller stocks are usually the first ones to turn down. Chart 2 shows the S&P 400 Mid Cap Index ($MID) failing a test of its 50-day line. It too is falling further below that resistance line today. As a result, the S&P 500 is in danger of falling below its 50-day line as well.

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Chart 1

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Chart 2
S&P 500 IS TRADING BELOW ITS 50-DAY LINE... With small and midcap stocks back below their 50-day lines, odds favor the S&P 500 Large Cap Index doing the same. The daily bars in Chart 3 show the S&P 500 trading few points below its 50-day average during the last hour of trading. A close below that line would put the market back on the defensive again. As suggested yesterday, the next level of potential support would be at last Thursday's intra-day low near 2700. If that doesn't hold, the next level of support is near 2640. An upside breakout by the U.S. Dollar Index to a six-week high is putting downside pressure on commodity prices, and energy in particular. Energy shares are the day's weakest sector. Chart 4 shows the Energy SPDR (XLE) in danger of falling below its 200-day average. That would be a negative sign for it and the rest of the market.

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Chart 3
