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Economic data has stocks seeing red

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This morning's gross domestic product numbers showed a lower revision to the first quarter economic growth from previously reported 6.1% annual growth rate to 5%, and the preliminary 1.1% annual growth rate from the second quarter shows an economy that continues to grow, but not at as robust a level as thought earlier this year.

The GDP data was enough to have stocks opening lower, but losses built after the release (at 10:00 AM EST) of the Chicago purchasing managers index was released. Business activity decelerated sharply in the Chicago region in July, as the PMI report came in at 51.5% as compared to June's 58.2% reading. Economists were looking for the Chicago PMI to sink marginally to 56.4%. New orders fell to 52.4% from June's 61.4%. Employment dropped to 48.1% from 48.9%. Meanwhile, prices paid rose to a 21-month high of 64.5%.

The national purchasing managers index will be released on Thursday, with economists expecting a dip to 55.4% from 56.2%. It should be noted that the 50% level is considered a "waterline" that divides growth (above 50%) and contraction (below 50%) for both the Chicago and national PMI reports.

Both of this morning's economic reports has the market taking on a more defensive posture. Treasuries are now seeing a rather strong round of buying and YIELDS are lower across the board.

In this morning's market monitor at OptionInvestor.com, I had set a downside alert on the 10-year YIELD ($TNX.X) 4.505% at the 4.52% YIELD level to alert traders to potential weakness in stocks. That YIELD alert was triggered just about the time today's Chicago PMI report was released.

From there, the Dow Industrials (INDU) were trading down about 75 points and losses have been extended with the Dow Industrials currently down 128 points (-1.48%) at 8,550.

From here, I would now look for YIELD support (price resistance) at the 10-year YIELD of 4.365%. That might correlate with a Dow Industrials of 8,000. Currently, I'm monitoring the Dow Industrials for support at a retracement support level of 8,430, with retracement resistance up at 8,856.

Yesterday I thought bears might be shorting stocks with some tight stops set just above recent highs. While the Dow Industrials was able to edge above yesterday's Monday's high of 8,711, I'd expect some bears to once again be active in the markets.

Jeff Bailey
Senior Market Technician
Option Investor

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