After the close yesterday only 4.5% of the stocks in S&P 500 index where above their 50 day moving average, the lowest level since 2011. This oversold indication suggests a tradeable short-term bounce, but what would be even better would be a period of consolidation and base building, like the one that followed the low reading in 2011.
Today’s bounce was a bust.
The market gapped higher at the open and then began moving sideways in a narrow range with a downside bias. In the final hour of trading the selling picked up, accelerating into the close. All the major indices finished the day on their lows, with the S&P 500 and the NASDAQ having the added distinction of ending the session on yesterday’s sell-off low.
The kind of volatility seen over the last four trading days skews the daily momentum indicators and invalidates trend lines, removing short term technical context. It is always good advice not to try and catch a falling knife and, sometimes, it is just as prudent not to buy the reflex bounce.
(Goodbye Trading Range – We’ll Miss You)
We finally got what so many wanted for so long – a “healthy” correction. The pundits say that corrections are good things and that we should welcome and embrace them. I hate those guys. A large percentage of the “correction” happened in one week, and while it may turn out to be healthy over time, the velocity of the declines in the last several trading sessions has been scary.
A break below the rising support line of a small triangle pattern on the S&P 500 chart on Thursday, precipitated a sharp move downward which penetrated the support line of the larger channel trading range, and the decline continued without hesitation in Friday’s heavy volume session. A target projection for the channel breakdown is measured by taking the height of the channel and subtracting it from the support line. It projects to the 1950 area, and I think many traders and investors, at this point, would welcome some consolidation and basing at that slightly lower level.
The support levels that defined the bottom end of the consolidation ranges the major market indices have been trading in for most of the year were taken out to some degree or another in today’s session, and new lows are in place on these charts. As the dynamic of lower highs and lower lows continues it becomes less likely there will be a V-shaped bounce and rapid retest of the highs, many have come to expect from this market.
SPY volume was 73% greater than its 50 day moving average of volume. The last time there was a spike like this was at the end of June, just before the July lows were established, which helped define channel support.
The March/May zones that have supported the horizontal consolidations on the S&P 500 index and the NASDAQ Composite charts remain intact, but support on the DJIA chart has failed and a breakdown on the Russell 2000 chart may not be far behind.
The weekly charts show the Dow penetration with the 50 day moving average crossing below the 200 day average, and the Russell forming a narrow opening and closing range “doji” candle right on its former 2014 resistance and current 2015 support level.
On closer examination, however, there are issues with the S&P 500 and the Naz charts as well, for instance, the number of stocks above their 50 day moving averages continues to track lower, and the volume that accompanied Friday’s modest strength was light, about 21% below the 50 day moving average of volume on the S&P chart and 19% on the NASDAQ chart.
The bottom line though is not the March/May lows, it is the fact that a series of lower highs and lower lows continue to form on the major market index charts. Regardless of where we try to presume support should be, the pattern is clear and the dynamic is bearish.
The 1205 to 1215 area on the Russell 2000 weekly chart has been an important long term technical level. It contained price for all of 2014, and when that resistance was broken earlier this year its role reversed and it became support. The index tested this support zone in March and in May, and has been flirting with it again for the last three weeks. This week a “doji” candle formed, a candle with a narrow opening and closing range, right within its borders. It is a confusing candle (we’ve seen them before) at this juncture because it could be a reversal or a continuation indication. We’ll take a closer look at the major market index charts over the weekend.