Last week I said the market passed the 200 day test, but was still on double secret probation. Well things have deteriorated since then, significantly! The S&P 500 rallied sharply last week from oversold conditions. The index quickly rallied above 1294, which was prior critical intermediate term support. So, summer pullback over and we can go to Disneyland and forget about the market for a while, right? Not so fast. The rally last week was short lived and didn’t hold. The markets quickly ran out of steam and moved back down to their 200 day moving averages.
Write these numbers down. If these levels give way the market slide will accelerate. S&P 500, 1258 = June low. 1249 = the March low. If those levels give way it signals the selloff is getting ready to intensify. For the Dow and NASDAQ the critical levels are 11,776 and 2653 respectively. If these levels fail to hold selling will pick up.
I suspect, that just like last week, we’ll see a rally attempt from these levels. The markets have bounced off support twice now just to falter quickly. This can only happen so often before we get resolution.
A few weeks back I talked about being a professional coin flipper because there was a 50/50 chance of picking a winning stock. That was because 50% of stocks were either in basing or advancing stages technically. Things have changed dramatically over the past few weeks. Now only 33% of the stocks in the S&P 500 are sound technically with only 30% of the broader market in sound technical shape. The odds favor the market going lower at this stage. Do we fight back from the brink here? Keep it simple. The pros and cons of the market are all out there. If the levels I gave you do not hold, the bears have all the power and they will carry the day. If the levels of support hold the market will attempt to rally. People really like to chin wag at these stages of the market to show how “smart” they are. Me, I try to keep it simple. The charts of the major indexes encapsulate the thinking of all market participants. Now that thinking is telling me people do not like this market. If the levels give way you’ll see how much they do not like the market.
For the short term we can look at the VIX. It spiked above resistance recently just over 20. The VIX closed at 21.10 last week. The recent high was 24.65. If the VIX spikes above the recent high of 24.65, it is likely the resulting selling will drive the market down through the 200 day moving averages. The flip side to that is if the market calms down and the VIX moves below 18.76 you’ll see a rally attempt gain speed. The rally last week gets barely a passing grade. Really, it was just an opportunity to sell stocks as things faltered at the end of the week. If the 200 day moving averages hold again today and tomorrow you’ll likely see another rally. Last week things faltered right around 1300. If we cannot get above 1300 soon the odds favor more weakness.
