STOCKS SUFFER BIGGEST DROP SINCE THE SPRING -- 50-DAY MOVING AVERAGES HAVE BEEN BROKEN -- BREADTH MEASURE WEAKEN FURTHER

SEPTEMBER SELLING DEEPENS ON CHINA CONCERNS... Monday's heavy selling of stocks was the biggest drop since the spring.   The selling started in China on concerns over its property market and spread to Europe and the U.S.    Going into Monday, stocks were already pulling back on fears that seasonal weakness during September and October might lead to lower prices.   In addition, several breadth measures were already starting to weaken which warned of the potential for more selling to come.  They've now weakened even further.  Monday's heavy selling pushed the major stock indexes below their 50-day moving averages which signaled the possibility of a deeper pullback.

50-DAY MOVING AVERAGES ARE BROKEN...Chart 1 shows the Dow Industrials falling to the lowest level in two months and testing potential chart support along their June/July lows.  The Dow has been the weakest of the major market indexes.  Chart 2 shows the S&P 500 falling below its 50-day moving average and undercutting its August low.   Next potential support is at its July intra-day low at 4233.   Short-term momentum indicators have also weakened.   The lower box in Chart 2 shows the daily MACD lines dropping to the lowest levels in ten months.

Chart 3 shows the Nasdaq Composite also falling below its 50-day moving average.  Breadth figures which had been falling  have dropped even further which has weakened the market's technical condition.

BREADTH MEASURES WEAKEN FURTHER...Last Thursday's message showed three measures of market breadth which were suggesting weakness in the broader market.   All three have weakened further.   Chart 4 shows the percent of S&P 500 stocks above their 50-day moving average dropping to 31% which means that two-thirds of SPX stocks are in short-term downtrends.    Chart 5 shows the percent of S&P 500 stocks above their 200-day moving average falling to 67% which is the lowest level since last October.

Chart 6 shows the NYSE Common Stock Only Advance-Decline line falling to the lowest level since the spring.  That line peaked in June and has been dropping since then while major market indexes were advancing.  All three falling lines showed selling taking place beneath the surface since the start of September and warned that the broader market was weaker than the major market indices were suggesting.   Their weakness increases the odds of more selling to come.