If Monday's huge rally seemed overdone, the market agreed with you yesterday. Profit-taking dominated the day, along with questions regarding the practicality of the Treasury's new plan to revive the financial system and the huge deficits dominated the news.
Stocks were down for most of the session but the market fell almost 100 points in the last half hour of trading, led by the banks and other financials.
At the close, the Dow was down 116 points to 7,660, the S&P 500 fell 17 points to 806 and the Nasdaq was off 39 points, closing at 1,516.
The NYSE traded 1.6 billion shares with decliners ahead of advancers by more than 2-to-1. On the Nasdaq, 672 million shares traded with decliners ahead by 8-to-5.
While several technicians expressed confidence on Monday that the market's ability to close above S&P 500 800 was a positive, yesterday they weren't sure that the market can hold above that psychologically important number. And the market's inability to move strongly into the zone north of 820 must also give them pause.
So the rally appears to be running out of steam and the ball is now passed back to the bears. Their strength is in the very overbought internal indicators.
Both the Moving Average Convergence/Divergence (MACD) and the slow stochastic are at levels equal to or greater than the key downside reversals in May 2008 and October 2007.
If buyers are not able to marshal their forces shortly, then the next support for the S&P 500 is at the 20-day moving average at 743, which also happens to be the bottom of the 742-780 trading island I've mentioned before.
While the market may be headed lower, commodity prices are on the rise. Reliance Steel & Aluminum Co. (NYSE: RS) is in a channel-uptrend with the potential to break from it as commodity prices improve, making it my Trade of the Day.
Sam Collins is a contributor to OptionsZone.com.
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