Stocks opened deeply lower on Tuesday. The S&P during the day fell below the 4120 level and reached 4111. As the afternoon wore on cooler heads seemed to prevail and the S&P climbed back from the low to close at 4152, down 36 points on the day but it was a strong recovery from what was an intraday 77 point decline.
The NASDAQ rally was even more impressive. After the index opened below the 100 day moving average it pushed back at one point the index turned positive. The close saw the NASDAQ down just 12 points to 13,389.
The Dow which had set a string of records had the worse day, losing 473 points but still down just 2.3% from its all-time high. So is the selling over? Let’s review the technical signals at the close of trading on Tuesday to see what Wednesday may look like for investors.
Stock Market Outlook Chart Comments At The Close on Tue May 11 2021
The Bollinger Bands Squeeze is turning lower. The closing candlestick was bearish for Wednesday and ended the day below the 21 day moving average. Intraday the index reached the Lower Bollinger Band before bouncing, which is bearish.
The 21 day moving average is climbing higher and further away from the 50 day moving average which is bullish.
The 50, 100 and 200 day moving averages are all climbing higher.
Overall the S&P chart is still bullish but there are now 4 bearish signals in the chart advising some caution for investors and the index looks like it may test the 50 day moving average which is at the 4050 valuation. That will be quite bearish should it happen.
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is negative and falling.
- 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 April 30 2021. On Tuesday the down signal gained strength.
- 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 is unchanged.
- 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 has a strong down signal in place.
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.
- 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.
- 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:
4250 is resistance
4225 is resistance
4200 is resistance
4150 is light support
4100 is light support
4070 is very light support
4050 is light support and where the 50 day is currently residing. This would represent a 4.4% decline.
4000 is Support
3900 is support and just below the 100 day moving average.
3850 is support
3800 is support
3750 is good support
3700 is light support and just below the 200 day moving average.
3680 is light support
3600 is strong support
Stock Market Outlook for Tomorrow – Wed May 12 2021
Tuesday rebound rally while impressive has a good chance of not holding. The decline on the SPX is only around 2% which is basically a large dip but not much more. It would be premature to think the sell-off is over after two days of selling.
The technical indicators are bearish which often means a bounce and then more selling.
For any bounce on Tuesday I will be buying a few more SPY put options out to June 18 expiry at the $400 to $410 put strikes. Overall for the S&P and NASDAQ it was a nice bounce but there is more downside to come.
Valuation Levels To Watch
There are no changes. The 4120 to 4125 is significant for the S&P. A break and close below this will set the index up to fall to the 4050 level which is the 50 day moving average. At level I would expect another bounce and then a re-evaluation to see if the index will break below 4050.
The NASDAQ broke through the 100 day moving average which resulted in a bounce back. The chance of this holding and then moving higher I think is limited at present. Investors remain nervous of inflationary expectations and worry the Fed will be unable to maintain interest rates at present levels into late next year as the Fed Chair have indicated.