By Jim Donnelly
After months of scoring a series of new daily highs, the Dow Jones Industrial Average finally broke below key trend line support currently at 16,625 sending a number of investors to the sidelines. A sharp 4% rebound in Q2 GDP combined with a modestly positive jobs report reignited worries that interest rates could rise sooner-than-expected. While the economic news sounded good, the perceived threat of an interest rates rise was interpreted as bad news for stocks.
Banking woes in Europe, triggered by mounting loan losses at Banco Espirito Santo of Portugal forced a rescue plan for that bank. Fears that similar financial bombshells might follow added to investor distress sending European equity shares as well as sovereign debt yields lower. Separately, a set of stiffer sanctions against Russia in the aftermath of the downing of flight MH17 also weighed on equity markets as potential repercussions of such a move were being assessed.
From a technical perspective, the break below key support at 16,625 on the DJIA points to the possibility that an extension down to a test of key support at the 15,530 could occur over the short-to intermediate term. If such a pullback were to occur, it would represent a relatively run-of-the-mill 9.25% decline from its high of 17,151 set on July 17th. That being said, if a subsequent break below support at 15,530 were to emerge, the current bearish mood could turn a whole lot darker.