The collapse of stocks on Tuesday was partially the result of the inability of stocks to rally. While it is true that the Fed is not any help and tariffs continue to be front and center of the many concerns worrying investors, the market has not been able to manage a serious rally that can slow the selling. In October the S&P had only had 4 positive trading days and only 2 of those saw any kind of market rally with the best being Tuesday Oct 16th’s 59 point rally. The only other up day of any consequence was Fri Oct 12 when the S&P rose 38 points. There have been 14 days of drops in the S&P with 5 of those being double digit.
The NASDAQ stats are worse with just 4 positive days and only two of those, on Oct 16 being of any size, with a 214 point advance and Oct 12 which saw a 167 point advance. Since the end of September the NASDAQ has lost 1000 points and experienced 13 down days with 6 of those seeing losses of over 90 points. Despite what large investors are saying about how they are buying the dip in stocks, most are not and when markets do pull back, they quickly move lower or move out of the way entirely.
The Dow and S&P have wiped out all gains for 2018 and the NASDAQ is clinging to just a 3% gain for the year.
Stock Market Outlook Chart Comments At The Close on Wed Oct 24 2018
The index closed well below the 200 day moving average at the lows of the day in what was the second worst sell-off this month for the S&P and worst for the NASDAQ.
The close at 2656 is the lowest close of this correction and the lowest since May 3 when the index closed at 2629.73. It is below the opening of Jan 2 which was at 2683.
This is the fourth biggest one day drop this year with Feb 8 still holding that distinction with its 101 point drop and Oct 10 with the second biggest at 94 points. The third biggest was Feb 8 with a 92 point drop.
The sell signal from the 21 day falling below the 50 day continues unabated and should cross the 100 day by Friday unless there is a bounce.When this happens it will be a major sell signal, the first since May and June when the 100 day crossed back and forth above and below the 50 day for a period of about a month, before the S&P regained its footing and continued higher.
The candlestick is bearish for Thursday with the index closing at the low of the day. Usually this results in a shallow bounce and then more downside.
All the major moving averages are continuing lower and the Lower Bollinger Band is falling quickly. The S&P closed below the Lower Bollinger Band today, also bearish.
Stock Market Outlook: Technical Indicators Review:
All indicators continue to signal lower as of Wednesday’s close.
Momentum: Momentum is negative but it is trending more sideways than down.
- 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. The signal was stronger on Wednesday and is at levels usually associated with a bounce commencing.
- 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 falling and also at a point where often a bounce occurs.
- 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 has a stronger down signal in place for Thursday and is deeply oversold. Normally a bounce will follow such readings.
- 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 turned lower on Wednesday and is very oversold. We should see a bounce shortly.
- 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 falling and at levels where a bounce is anticipated.
- 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 is resistance
2745 to 2750 are light resistance
2725 is light resistance
2700 was important support and may be retaken again if there is a bounce.
2675 is light support and was broken on Wednesday.
2650 is light support which looks set to be tested on Thursday.
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 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 – Thu Oct 25 2018
The indicators are extremely bearish but also are signaling very oversold.
Technically the market keeps breaking support levels without much if any bounce back. The only rally of any significance was on Tuesday of last week which had no follow through of any kind.
The correction looks set to move deeper even if there is a bounce.
Yesterday’s dramatic reversal seemed to indicate buyers were waiting in the wings to swoop in. They were wrong and many will be dumping shares they just bought, if the market continues to move lower.
On Thursday the market will probably start the day with a bounce and then drop to at least 2650 but more likely below it and then we might see a better chance on Friday for a bounce. Caution is definitely warranted though as there was higher volume on Wednesday but no signs of a panic or a wash out day. That could mean there is still more downside until we see a lot more fear from investors. The VIX for example, rose to $25.23 for a 21.8% gain but it is still below the 28 level of Oct 11 and well below the 35 to 40 levels we saw in the February correction. That correction sent panic through investors. At present most investors are still of the opinion this is a garden-style correction although large buyers such as pension funds, etc., do not appear to be buying the downturn at this time in any quantity. This is why I think caution is warranted.
Thursday will end lower but a true washout day could still lie ahead, as the correction deepens after Wednesday’s sell-off.
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