Technical Red Flags Could Signal More Stock Market Selling

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Markets threw up enough technical red flags amid a wave of volatility Wednesday to have traders wondering if the first real sell off of 2013 has finally arrived.

The Dow, down 108 to 13,927 had its worst day since Feb. 4 and the S&P 500 , off nearly 19 to 1511 had its worst day of the year.Gold, in a multi-session decline, approached a "death cross," a bearish signal when the 50-day moving average falls below the 200-day.

"This is the first time the S and P had a decisive break below the eight-day moving average which it's been holding through all of 2013," said Scott Redler of "Traders were looking for some type of signal to trim some positions and get short. Today's the signal…You had the home builders break their 21-day moving average and they had been market leaders."

Redler pointed out the technical warnings are flashing, as markets head into the final week for Congress and the White House to avoid"sequestered" spending cuts. The $85 billion in cuts this year and $1 trillion over 10 years would start March 1 if there is no deal made, and the White House and House Republicans show no sign of coming together on a compromise. Analysts have expected fiscal concerns to cause the market to sputter but the market has so far been shrugging off Washington's banter over the sequester.

Read More: ( Gold's 'Death Cross' Could Tarnish the Yellow Metal )

Traders and analysts have also been expecting for weeks to see a sell off that would be fairly shallow, after the stock market's 7 percent gain this year. Wednesday's total New York Stock Exchange volume was the largest of the year so far, at 4.06 billion shares.

"Nobody's panicking about this move, but the housing sell off got stronger as the day went on," said one stock trader. The SPDR Home Builders ETF was off 4.5 percent.

Both Brent crude and West Texas Intermediate declined about 2 percent on heavy volume, and the euro first rose then sold off, closing below Tuesday's level, a bearish reversal. S&P 500 futures also saw a bearish reversal, and traders were watching them decline after U.S. stocks closed,expecting more selling Thursday morning. Stock futures were slightly higher in Wednesday evening trading.

"What it represents is a wholesale shift in market psychology," said MacNeil Curry, technical strategist at Bank of America Merrill Lynch.

The course of financial markets overnight will be important as will Thursday's economic reports. Existing home sales will be extremely key, at 10 a.m. after the sharp unexpected decline in housing starts Wednesday helped kick off the selling. There is also weekly jobless claims at 8:30 a.m. ,as well as the Philadelphia Fed survey and leading indicators, both at 10 a.m.

Another big report of the morning will be Wal-Mart earnings,after news reports last week suggested February sales could be very soft as consumers struggle with higher payroll taxes and rising gasoline prices. Other companies reporting include Chesapeake Energy, Safeway, CMS Energy, Ensco, Hormel, Tim Horton, Imax and HSN, before the open. Hewlett-Packard, AIG, Newmont Mining, Nordstrom and Public Storage report earnings after the closing bell.

As oil slumped in morning trading Wednesday and then moved lower, traders said an unsubstantiated rumor circulated about a hedge fund that was forced to sell. The same story traversed metals markets, currencies and stocks.

"That was the chatter. I think the market has been setting up for this," said Tradition Energy analyst Gene McGillian of WTI futures. "We started turning lower on poor housing starts numbers. I think the selling pressure accelerated as we broke through $96. There was nothing to hold it up at the previous support level. Whether that was caused by fund liquidations remains to be seen . I think it's more the market was ready to break out of its trading range of the past month."

The Fed's 2 p.m. ET release of minutes from its last meeting showed that some members for a second month, in January, questioned the Fed's quantitative easing program. The Fed is purchasing $85 billion a month in Treasurys and mortgage securities.

"We respect the price action but our take is the market is taking this as too hawkish," said Win Thin, senior currency strategist at Brown Brothers Harriman. "We know they're talking about exit. We knew that…They just extended this in December so it's not going to be a 180 degree about face in the next couple of months. This is the second month in a row where the minutes surprised a little bit. The technical damage is there. The market was looking or euro gains."

Thin said the euro hit a key technical point of 132.70 and could now aim at 1.30. "We're not out of this year's range yet, but it looks like we're testing the bottom of the range," Thin said. Sterling was also a casualty, losing more than a percent against the dollar.

"I would expect dollar/yen to grind lower but against other currencies, the dollar should do very well. I think we're moving into a period of risk aversion and that should support Treasurys as well," said Curry. Curry also said he does not expect the selling in gold to end yet, and that he is most concerned about copper.

Read More: ( Gold Poised for a Bounce: Rule )

Curry said the death cross is about 30 percent successful,as a signal, but he said the copper chart is carving out a head and shouldersformation, signaling a potentially sharp selloff.

Treasurys traded fairly steadily after the Fed meetings,while risk markets sold off. J.P. Morgan economist Michael Feroli said in a note that he viewed the minutes as more dovish in January. The bond market had moved sharply after the December minutes revealed some members wanted to see the Fed end its QE asset purchases by the end of 2013, earlier than expected.

"The discussion of asset purchases dropped any reference to the Committee's view of the date at which those purchases will likely end; while this could be seen as a dovish turn in the discussion, it could just as well simply represent a desire to avoid a relapse into calendar-date guidance that occurred in the last minutes," Feroli wrote.