With the NASDAQ in “bear market” territory and the S&P down just shy of 18%, Friday ended the worst week of the markets since Feb or March 2009. The biggest catalyst that created the worst move lower was yet another interest rate increase by Fed Chair Powell. When combined with what was a most confusing non-dovish news conference and the market had all the makings of a sell-off. Friday continued that trend despite the Fed waltzing out New York Fed President John Williams who tried hard to “explain” what Fed Chair Powell was trying to explain in his remarks on Wednesday. That didn’t help at all but it did create a short period of time when markets rallied 20 points, allowing many bears to setup additional trades for another move back down. Overall the Fed has done a terrible job of communicating and laying out a reasonable strategy which would calm investors who remain concerned about the Fed and the outlook for the economy. Williams words were not nearly enough and the carnage from the Fed policies continued unabated into the close.
The indexes ended the week at the lowest valuation in 52 weeks, wiping out all the gains from 2018 and some of the 2017 gains.
Stock Market Outlook Chart Comments At The Close on Thu Dec 20 2018
The S&P chart remains bearish with 5 sell signals. On Friday the 100 day fell to the 200 day but not below it. When it falls below it will be the 6th sell signal and third major sell signal.
The index though is deeply oversold. You can see the waterfall decline over the past week which every day saw the S&P close either at or below the Lower Bollinger Band, a bearish signal.
A bounce could happen at any time. It won’t end the sell-off but it should slow the descent.
The closing candlestick on Friday was bearish.
The Bollinger Bands continue to fall, pointing to more downside ahead for the S&P. Normally we should at the very least, expect a bounce back to 2500 and a retest of that level, before more selling consumes the market.
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is negative but trying to rise slightly on Friday. It is extremely 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 Mon Dec 10 2018. That down signal was very strong on Friday.
- 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 moving lower and into oversold readings.
- 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 very oversold and is now flashing a down signal.
- 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 very oversold.
- 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 very 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 support – this will be strong resistance
2860 was support – this will be resistance
2830 was light support and will be light resistance
2800 is strong resistance
2795 is light resistance
2745 to 2750 is light resistance
2725 is light resistance
2700 is resistance
2675 is light resistance
2650 is light resistance
2620 is light resistance
2600 is strong resistance.
There is good support at the 2550 level from where the market bounced back from the recent correction low on Feb 9. Despite closing below it, the 2550 level still has support for the market if it can be recovered quickly.
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 of 641 points as a drop to this level would be 21% and just 5% away from a bear market signal ending the bull market from 2009.
Stock Market Outlook for Tomorrow – Mon Dec 24 2018
There are no positive signals in the technical indicators or in the S&P chart.
There are though many signs pointing to an extremely oversold market. With the Christmas holidays starting, Monday is a half day which means smaller volumes could see the index try a bounce.
It won’t hold. Markets are not just going to end the correction in any bounce back. Instead any bounce is a chance to sell out of profitable trades and look for more chances to setup additional trades that are biased to another move back lower.
The amount of technical damage done since October, thanks to the Fed’s aggressive stance on interest rates, is enormous and it will not recover quickly. Bounces will not hold until more technical support has been accomplished and that will take weeks to develope.
Monday then looks like a bounce that cannot break the underlying trend of lower.
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