Stocks can go down, and it now looks like they will. The market, as measured by the Standard & Poors 500 Index ($SPX) continued to rise at a dizzying pace until the Fed meeting ended on Wednesday. Now stocks are taking on a more bearish tone.
Typically, the market pulls back to at least the 20-day moving average in these situations, and usually overshoots that target. Currently, that 20-day moving average is at 1725.
From mid-morning just two weeks ago (October 9th) through Tuesday's close, the Standard & Poors 500 Index ($SPX) rose 115 points. That is impressive, but the advance has been so swift that it has created a number of overbought conditions that are on the brink of becoming sell signals. $SPX has support at 1730 and 1700.
Equity-only put-call ratios have rolled over to buy signals.
The volatile moves this week have given rise to a number of new trading signals. Since some are in conflict with others, one has to make a choice as to how to approach them.
$SPX sold off sharply and recovered sharply and is now more or less where it was just over a week ago. An $SPX close above 1695 would likely pave the way for another attempt at the all-time highs of 1730, which is also resistance.
The market is getting more volatile and bearish as the combined pressures weigh upon it. These include the Congressional wranglings, the negative seasonality of early October, and the technical deterioration of our indicators.
The Standard & Poors 500 Index ($SPX) has support at 1660-1670 and at 1630 below that. There is resistance at 1730.
$SPX exploded to the upside after the Fed's announcement that they were not going to taper, with both new buying and short covering entering into the fray. With $SPX now at new all-time highs, it has positive momentum, but is also extremely overbought. This latter condition will eventually lead to some sell signals, but perhaps not right away.
$SPX made a strong upside push this week and that closed the downside gap from nearly a month ago. That officially terminated the "bearish" status of the $SPX chart. It's hard to say that the chart has turned bullish, though, since there is still overhead resistance at 1700- 1710. Underneath, there is support at 1660 and then stronger support at 1630-1640.
Stocks gapped higher on the open yesterday and just kept going higher all day. $SPX has now closed above its declining 20-day moving average for the first since the market topped out just over a month ago. Oversold rallies – which this still may proved to be (although it seemed stronger than that on Monday) – usually die out at about this level: just beyond the declining 20-day moving average. Chart-wise, $SPX is now at the 1670 resistance area.
The stock market has continued lower, after first breaking significant support at 1680 about two weeks ago. With the further breakdown this week, below the next support level at 1640, there is a distinct pattern of lower highs and lower lows. That makes the $SPX chart bearish.
Equity-only put-call ratios are both on sell signals.
Nearly all of our indicators turned bearish in the last two weeks. The breakdown of the Standard & Poors 500 Index ($SPX) below support at 1680 was the trigger that turned the $SPX chart negative.
However, market breadth is already oversold, and buy signals are beginning to appear from these indicators.
The feature article deals with two indicators that we have occasionally referenced. They are long- to intermediate-term indicators and both are either on a sell signal or on the verge of one. The studies involving these indicators were much more complicated than normal systems because of the longer-term nature of the holding period.
