Pullback May Be Picking Up Steam

What could be worse than Wednesday’s broad-based stock market losses? The fact that the selling came on only moderate trading volume, a sign to some analysts that a deeper decline is on the way.

Barely 1 billion shares changed hands on the Nasdaq Stock Market, and 996 million in New York Stock Exchange composite trading. Both numbers are about average for the last month.

Often, market pullbacks such as the one underway now end only in climactic sell-offs accompanied by a burst of trading volume.

That happens when the “weak” holders of stocks--those now on the fence about staying in the market--capitulate and dump their shares in often frenzied activity. With the supply of sellers exhausted at least for the near term, stocks can begin to recover as buyers start to nibble on what they perceive as bargains.

By contrast, sell-offs in moderate volume can go on for a while, experts say.

“The law of sustained declines is that they’re grinding in nature, done on relatively low volume and are persistent day after day,” said John Bollinger, a well-known technical analyst and president of EquityTrader.com. “We’re probably just getting underway here.”

Many professional investors were caught off guard Tuesday when the market declined sharply after last week’s rebound. The Dow Jones industrials slid 231.12 points Tuesday, the worst one-day point loss since May. The Dow had surged 377 points last week.

Many investors thought stocks would rally further this week as companies begin to report what are expected to be strong third-quarter earnings.

That thinking got a jolt after the market closed Tuesday, as Intel Corp. reported lower-than-expected earnings and Motorola met, but didn’t exceed, estimates.

Selling in Intel, Motorola and other tech giants--the market’s favorite sector for much of the last few years--helped drive the broad market lower Wednesday.

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Still, even though some large investors clearly were unloading stock Wednesday, trading seemed orderly, said Gary Wedbush, trading chief at Wedbush Morgan Securities in Los Angeles.

“We had a lot of sellers,” Wedbush said, “but none of them were [saying], ‘I’ve got to be out today.’ ”

The Dow index, which at 10,232.16 on Wednesday was down 9.7% from its record high of 11,326.04 reached Aug. 25, looks particularly weak at the moment, according to technical analysts who look for clues about the market by studying price patterns on charts.

Late last month, the Dow broke below a “support” level of about 10,500. A support level is a point at which an index or stock has historically rebounded from sell-offs.

The Dow rose back above 10,500 last week. But with this week’s plunge, 10,500 now appears to have become a “resistance” level--a line the index might find difficult to surmount, Bollinger said.

Previous support levels turn into resistance levels when investors become accustomed to selling at that level--a sign of their lack of faith in the market’s ability to rebound significantly, said Michael Kahn, chief technical analyst for BridgeNews.

“The people who missed their chance to sell the first time are thinking, ‘Great, now I can get out,’ ” Kahn said.

Among other trouble signs, Kahn notes that the highs the Dow and Standard & Poor’s 500-stock have hit in recent brief rallies have been below the highs reached in previous rallies, while the lows reached during subsequent bouts of selling have been below the lows of previous sell-offs.

“All these things added together say it’s a down market,” Kahn said.

A key test for the Dow will be whether it can hold above the 9,800 level, some technicians say.

Falling below that level could trigger heavier selling, they warn.