Dec. 14, 2018 – This weeks seems like it was a quiet one if you measure from last Friday’s close to today’s, but anyone who was paying attention this week knows we were subjected to several pretty severe intra-day reversals.
From Monday through Thursday, the average daily move from low to high is 1.53%. Meanwhile, the average daily change as calculated from the previous close is just 0.16%. Those wild swings made for some strange days. Monday for example, where the market opened lower and then kept falling before reversing and climbing through the afternoon. Stocks closed out Monday up 0.18% from last Friday’s close, but it felt like a huge win to close that far away from the lows.
Tuesday, stocks opened at a high and then spent most of the day dropping before a rebound in the last hour of trading. Again, creating a disorienting effect for traders of a small loss on the day that felt much larger given how high we were at the open.
Market watchers noticed any number of patterns and floated all manner of theories to try to explain the market action, but no consensus answer really seems to exist for many of the week’s unanswered questions:
Why did the market make a turn at 11:30 ET when European markets closed several days in a row?
Was algorithmic trading to blame for the new “sell the rips” market?
What we do know is that there doesn’t seem to be a lot of conviction about anything. So far in December, consumer discretionary stocks, traditionally a safe-haven, are down slightly less than technology stocks, but over the past week, tech stocks have outperformed by a bit. If you go back to early October, when the bottom really fell out of the momentum trade, you don’t see much rotation into defensive sectors.
Trade uncertainty, interest rates, and a lot of questions about the strength of the global economy have all played a role in the market’s weakness over the last couple of months. But, bond yields are now lower than they were when the selling started, most of the trade headlines have been positive (although headlines are different from trade deals) and outside of some weakness in the housing sector, the data from the U.S. economy is still good.
It seems that for now, the market is fixated on the sheer number of potential problems to get any traction on a rally, but traders aren’t quite ready to retrench into defensive positions either.
This week, the S&P 500 dropped 1.4%. The Dow lost 1.3% and the Nasdaq fell 1.2%.
Two weeks ago in this space, we placed support and resistance lines on all the major indices’ charts. We were seeing a market that seemed like it wanted to bounce and were setting our expectations on what may happen at those levels should the market continue to rise or decide to pull back. Last week, we left those previous lines, while adding additional levels of support as we saw the market make a major U-turn and sell off rapidly.
We will be displaying two charts for each of the indices this week, leaving all the previous support and resistance lines. This will help us to see how the market reacted at those levels and how those levels will continue to be of importance in the weeks to come. One of the two charts for each index will be shown on a two-year scale, so we can see why we placed support and resistance at those levels and to see how the market reacted at those levels over the course of 3 weeks. In the other, we will be looking at the indices on a 3-month chart, so we can see how the moving averages played into any possibility of a bounce this week, keeping them running sideways and bouncing between technical levels and moving averages.
When the market sold off on December 4, the S&P crashed through its 8, 20, 50, and 200-day moving averages and numerous levels of technical support. Following the selloff, the convergence of the 8 and 20-day moving averages at technical resistance forced the S&P lower. Every time the index attempted to rebound, it was pressed by the moving averages. The 2,620 level of support had previously proved to be solid, and we had hoped to find footing there, but as the moving averages pressed lower, that level of support could not hold and the S&P dropped on Friday. We are hoping that the 2,580 and 2,560 levels of support can boost the S&P.
Like the S&P, the Nasdaq has converging moving averages, which when combined with technical resistance was like a brick wall. The Nasdaq bounced between the moving averages and support near 6,900 but continued lower as the moving averages pressed the index downwards. If footing is not found at 6,900 or 6,800, the gaps between support become larger and the support itself becomes weaker. This will make rebounding harder, as the stronger levels of support become resistance and the moving averages remain above the Nasdaq’s current price.
Dow Jones Industrial Average
The Dow Jones faced the worst resistance, with its 2, 20, and 200-day coming together, sending the Dow plummeting. After bouncing between support and resistance at 24,200 and 24,800, the index continued to fall every time it encountered its 8-day moving average. Like the other indices, if support can’t be found soon, things could get much worse before they get better. Hopefully, the 23,600 level of support can serve as a last line of defense should the Dow continue to drop.
Three weeks ago, we were seeing the Russell attempting to rebound. When the index approached resistance at 1,550, it faced additional pressure from its 50-day moving average, and we saw the Russell sell off sharply on December 4, crashing through its 8 and 20-day moving averages as well as technical support near 1,510 and 1,490. After such a steep decline last week, it appeared that footing had been found at 1,440, but when squeezed by the 8-day moving average, the Russell continued downwards, coming to rest at 1,410. We would like to see the 1,410-level hold, but should it continue to fall, it has very good support at the 1,390 and 1,350 levels.