The collapse of stock markets on Monday to start off the week was caused by concerns over the global impact if the coronavirus spread is not contained quick enough. That was the spark that caused the selling but the volume and the drop was a result of an overbought market that investors were looking for a reason, to take some profits in. Selling loves more selling and once sellers got started, other investors were drawn in. This is typical of a sell-off day in a bull market.
While the drop may seem “large” the majority of stocks are so high that the drop really has not made stocks any more attractive. Most stocks would have to fall 10% or more to become extremely attractive. Instead what we saw was drops of one to three percent on many stocks that are already up 30% or more in the past several weeks, and indeed some just since the start of the year.
The S&P ended the day on Monday down 1.57% for a loss of 51 points to close at 3243.63.
Stock Market Outlook Chart Comments At The Close on Mon Jan 27 2020
The SPX chart turned bearish on Friday with a long red candlestick almost reaching the 21 day moving average. I wrote yesterday that Friday’s drop would be followed by several more days of selling. Monday’s drop was probably enough for a couple of normal days of selling. You can see in the chart that the candlestick for Tuesday points to a large potential for a bounce. The bounce won’t recover all the losses but it should try to recover the 21 day moving average.
The Lower Bollinger Band is falling and we should see the Upper Bollinger Band continue to move back down as well.
All the major moving averages are still climbing. Only the 21 day moving average is beginning to turn lower.
Part of the reason the index could fall so easily is lack of support. There are four support levels in place. These are 3200 which may get tested this week, 3100 which is a full 100 points lower, 3075 which is light support and 3000 which is major support.
The chart is pointing to a strong possibility of a bounce attempt tomorrow of perhaps as much as 25 points or half of what was lost, but then more weakness. The Fed could change this outlook, mid-week by any positive comments on supporting the economy and the markets which is probably highly likely to happen.
Stock Market Outlook review of Mon Jan 27 2020
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is falling and now turn slightly negative.
- Settings: For momentum I use a 10 period when studying market direction.
MACD Histogram: MACD (Moving Averages Convergence / Divergence) issued a down signal on Friday Jan 24. At the close today that signal was strongly confirmed.
- 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 not overbought and is falling lower.
- 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 is not overbought and has a down signal in place for Tuesday.
- 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.
Relative Strength Index: The RSI signal is falling and is into oversold signals.
- 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 also falling and it too is 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 and Resistance Levels To Be Aware Of:
3325 is resistance
3200 is light support
3100 is light support
3075 is light support
3030 is very light support
3000 is good support and if the S&P fell this low it would mark a normal correction in a bull market
2960 is light support
2900 is light support
2860 is light support
2840 is good support
2800 is strong support
Stock Market Outlook for Tomorrow – Tue Jan 28 2020
For Tuesday the technical indicators are no longer overbought and we have a confirmed down signal from MACD. As well the Slow Stochastic is signaling down. Two technical indicators are showing the market as oversold. We should see a bounce on Tuesday, at least in the morning but the selling may not stop after Monday’s trouncing.
Tuesday though looks like a good candidate for the market to bounce in the morning. Then we can see if the bounce holds into the afternoon or whether investors decide to use the bounce to take further profits and send the index lower for the close and into Wednesday.
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