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Stock Indexes Close Sharply Lower As Market Faces This Critical Test

Stock indexes pared losses Wednesday after the day's broad losses left the market looking to a key indicator for signs on its future direction.

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The S&P 500 slid 0.8% on the stock market today. The Nasdaq composite fell 1.2% for its largest loss since July 30. The Dow Jones industrial average lost 0.5%.

Nasdaq and S&P 500 lows coincided with the 50-day moving averages. Indexes often bounce from that price-trend indicator, as the Nasdaq did in late June and late July.

The bounce in the final hour of Wednesday's trading suggested another rebound is possible, a potentially good sign. But if the Nasdaq and Dow sink below the moving averages, it would be reason to be more cautious. Thus, the test of support is the most important signal for the market's immediate future.

Small caps did not escape selling, as the Russell 2000 slid 1.2% at the closing bell.

Volume rose sharply from Tuesday's levels, leaving little doubt that institutional investors participated heavily in the market sell-off. Institutional selling had been restrained in the past several weeks, but now investors have to watch for a return of big-volume selling.

Energy, mining, retail and semiconductor sectors were Wednesday's weakest.

Macy's (M) underscored the weakness in retail. Shares tumbled 16% Wednesday, just one day after enthusiasm ahead of this morning's earnings report sent the stock above a 41.04 buy point in big volume. But investors dumped shares despite Macy's positive report. The company beat profit views and raised guidance. The loss resulted in a sell signal for Macy's.

Investors sought shelter in yield-type investments. The SPDR Utilities ETF (XLU) climbed 0.9%. The yield on the 10-year Treasury note fell 4 basis points to 2.85% in a rush for bonds. Real estate stocks — which include dividend-rich REITs — also climbed.

Other defensive groups stood tall, including tobacco and soap companies and food-related industries.

As for the rest of the market, there was gloom just about everywhere. Declining stocks led advancers by 7-2 on the Nasdaq and by 9-4 on the NYSE.

The IBD 50 fell 1.4% based on unconfirmed numbers. Yet only a few stocks suffered any serious damage. Palo Alto Networks (PANW) closed below the 50-day line. Match Group (MTCH) slid 3% and is below its 48.75 buy point. Orion Engineered Carbons (OEC) closed below the 34.05 buy point of its Aug. 3 breakout.

A rout in Chinese stocks continued while other emerging markets tumbled. IShares MSCI Emerging Markets ETF (EEM) fell nearly 3% to its lowest level in more than 13 months. IShares China Large-Cap ETF (FXI) fell 3.5% and also hit a 13-month low.

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