Thursday was yet another wild day on the markets with the Dow at one point down 700 points and then rallying back only to sell off again to close down over 500 points. The S&P ended the day down 2.06% losing 57 more points to close well below the 200 day moving average after punching through support levels at 2745 and 2725 before bounce back to close above the 2725 support level.
Through the day the S&P reached a high of 2795 and a low of 2710 marking an incredible 85 point swing.
Of the three indexes the NASDAQ ended the day with the best performance, losing 1.25% closing at 7329. The Dow lost 2.13% and during the day it broke 25000 reaching a low of 24,899. It was an epic day for bears and leaves the markets deeply oversold. A bounce is in order.
Stock Market Outlook Chart Comments At The Close on Thu Oct 11 2018
Tonight I am showing the S&P chart since the start of the year. You can see the index has given back all the gains of the year. It closed today well below the 200 day moving average. Looking at the past year, the start of the year saw three moves back to the 200 day moving average, each of which brought out bearish analysts and predictions. One move down to the 200 day in late March closed below the 200 day almost in the same manner as we saw today.
The move was followed by an up day with not much strength. However the following day saw a strong up move and the third day after the close below the 200 day, the S&P has a pop higher. That was followed by another move back to the 200 day moving average.
Looking at the March to April correction this year, it took a total of 30 trading days before the index began to recover. If that happens this time around it will be early to mid-December before the index has any kind of recovery. If that is the case, then those predicting 3000 on the S&P by year end may be wrong or they are of the opinion that the index will rebound sharply within the next few trading days. I have no prediction on when the correction will end, but overall the pullback looks similar to prior pullbacks in this bull market so at present, investors have to give the benefit of the doubt to the bulls, in my opinion until we see a further decline.
At present the downturn has wiped out 212 points from the S&P. With an all-time high of 2940, the drop is not yet 10%. Some corrections can go as deep as 15% which would mean a loss of about 500 points in total or a bit more than double what we have seen so far. That could be difficult for a lot of investors to handle, so fingers crossed, we don’t end up going that route.
Looking at the chart above the S&P is bearish. The Bollinger Band Squeeze has ended with the index falling. All the moving averages are turning lower.
Stock Market Outlook: Technical Indicators Review:
All indicators are strongly bearish tonight.
Momentum: Momentum is oversold
- Settings: For momentum I use a 10 period when studying market direction.
MACD Histogram: MACD (Moving Averages Convergence / Divergence) issued a down signal on Wednesday Sep 26. It is very oversold.
- Settings: For MACD Histogram, I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9.
Ultimate Oscillator: The Ultimate Oscillator signal is negative somewhat oversold.
- Settings: The Ultimate Oscillator settings are: Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months.
Slow Stochastic: The Slow Stochastic still now has a strong down signal in place and is oversold.
- Settings: For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic tries to predict the market direction further out than just one day.
The last two indicators I want to show separately.
Relative Strength Index: The RSI signal is lower is at an extremely oversold reading of just 3.05. There is not much further for this indicator to fall to reach zero. I have never seen a reading this low that is not followed by a bounce.
- Settings: The relative strength index is set for a period of 5 which gives it 5 days of market movement to monitor. It is often the first indicator to show an overbought or oversold signal.
Rate of Change: The rate of change signal is deeply oversold at minus 5.56. Again it is rare to not see a bounce back when the signal is this oversold.
- Settings: Rate Of Change is set for a 21 period. This indicator looks back 21 days and compares price action from the past to the present. With the Rate Of Change, prices are rising when signals are positive. Conversely, prices are falling when signals are negative. As an advance rises the Rate Of Change signal should also rise higher, otherwise the rally is suspect. A decline should see the Rate Of Change fall into negative signals. The more negative the signals the stronger the decline.
Support Resistance Levels To Be Aware Of:
2900 was good support – this will be strong resistance
2860 was good support – this will be resistance
2830 was light support and will be light resistance
2795 was light support and will now be resistance
2745 to 2750 is light support that could easily be recovered
2725 is light support.
2700 is support.
2675 is light support.
2650 is light support
2620 is light support
2600 is strong support.
There is good support at the 2550 level from where the market bounced back from the recent correction low on Feb 9.
The S&P has light support at 2480. It also has light support at 2450 and good support at 2425. Below that there is some support at 2400, 2380, 2350. 2300 has the most support at present but would represent a full correction as a drop to this level would be 20% and just 5% away from a potential bear market signal.
Stock Market Outlook for Tomorrow – Fri Oct 12 2018
The technical indicators are pointing to an incredibly oversold market. The S&P should bounce back but the first bounce from this sell-off will be highly suspect and probably not hold. But if we get a bounce on Friday and a positive close it will help.
I am expecting a bounce, some selling and then a stronger push back but still a struggle to close positive. The market does not need a huge run-up on Friday. It just needs to slow the selling and restore a bit of calm. Next week will be the next test but we will know a lot more on Friday by the close.
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