The big 5% Wednesday was followed by a strong intra-day pullback but a strong close. In the end, all major market averages finished near the highs of their daily range.
Overall, today was a big win for the bulls. There are more stocks setting up and looking constructively. With all positives in mind, it makes sense to continue to be cautious and to operate with the thesis that this is just a rally within an ongoing bear market, which means stay nimble and don’t hesitate to take partial profits on strength, often. From a technical perspective, SPY has room to run to 260 before it encounters a serious resistance.
The stock market has been in a free fall as of late. Last week, we saw a major acceleration in the selloff. Ever since the S&P 500 lost 2600, the selling has been relentless. Market breadth has reached deeply oversold levels that are seen very rarely. Sentiment is getting more bearish by the minute. These conditions have historically led to two outcomes:
A 10-15% counter-trend bounce;
The first is more likely than the second, but the second is not impossible.
In today’s show, we go over the price action in SPY, QQQ, AAPL, HYG, USO, AMZN, FB, among many others.
The small-cap index, Russell 2000 (IWM) has already erased its entire 2017 gain and it is back to potential technical support in the low 130s.
(click anywhere on the charts to expand them)
The S&P 500, pierced its year-to-date lows and it is trading near potential technical support at 250.
The Nasdaq 100 is now negative for the year and 17% below its 52-week highs. It’s within a striking distance from 150, which is its year-to-date low.
In the meantime, market breadth readings have reached extremely oversold readings:
– only 4% of the S&P 500 stocks are above their 5-day moving average;
– only 1.4% of the S&P 500 stocks are above their 20-day moving average;
– only 11.3% of the S&P 500 stocks are above their 50-day moving average;
– only 20% of the S&P 500 stocks are above their 200-day moving average – a level not seen since January 2016.
The major U.S. stock indexes are at sentiment and technical levels that will either lead to a 4-5% short-term bounce or to a flash crash (quick 5-10% swoosh lower followed by a bounce that erases that entire swoosh).
Correlations are extremely high during market corrections and the first stages of a market bounce. Stock picking is not as important in this such an environment, because stocks recover and crash together. This is why many active traders prefer to use leveraged ETFs like TQQQ to play any type of a bounce (TQQQ is 3x long the Nasdaq 100).
Any potential bounce would be in the context of an ongoing bear market, so make sure you have an exit strategy.
The market correction continues with full force and there are no places to hide. The stocks that held the best in the past couple of weeks – enterprise software, are among the hardest hit today. This is what typically happens during forced liquidations when people emotionally decide to get out of everything at any price.
The area near 260 was a major level of support for most of 2018. Today that level was breached on high volume, which typically means that it will now act as a resistance.
People keep saying that some of the most powerful rallies happen in the context of a bear market. It is true, but they are not that easy to time. Some of the important signs of a potential turnaround bounce would include a failed breakdown that leads to a strong close and a gap up on the next day.
In today’s show, we go over the price action in SPY, QQQ, OKTA, ZEN, TWLO, BBY, and some of the defensive stocks.
As active market participants, we need to be prepared for different market scenarios. Here are the two most logical developments for the rest of the year:
$260 is the line in the sand for the S&P 500. It has been tested numerous times this year. Buyers have consistently stepped up to defend it. If SPY loses it, we will likely see another quick leg lower and 260 is likely to become a level of resistance. Since correlations between stocks are extremely high during corrections, no sector can really be a safe place.
The bullish short-term scenario is 260 holds and the market rallies on some type of unexpected news. Another variation of this scenario is an intraday break of 260 to lure short-sellers and then a strong rally and a close above it. If this happens, the two types of stocks that you would want to own on the long side are:
The ones that have held the best so far – enterprise software stocks like AYX, WDAY, OKTA, SPLK, TWLO, etc.
The ones that have been hit the worst – Chinese ADRs, high-momentum stocks that have correct 40-50% from their recent all-time highs like GRUB.
On this Momentum Monday, we also discussed the impact of the stock market on the economy and most specifically AAPL and LULU.