Uncategorized, Weekly Update

When Markets Come Unglued, Technical Factors Become More Important

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Published November 16, 2018


Stocks have brought smiles to the faces of technical analysts everywhere. Per the textbook, stocks rebounded right back to the underside of key technical reference points before selling commenced anew. That’s point number one for the technicians. See below the rallies in the small-cap Russell 2000 (IWM) and Nasdaq 100 ($NDX or QQQ) that stopped right where a computer would be programmed to sell – very clearly referenced trendlines (highlighted with the downward arrows).

Technical Analysis at play on IWM

Technical Analysis at play on Nasdaq 100

The above chart circles two points in the last market pullback earlier this year and the current correction. Technicians expect selloffs to have a ‘retest’ of the initial low point. The initial low is labeled ‘1’ with the retest ‘2’. Earlier this week, we were in the midst of the retest.

Further pursuing the notion of technical analysis of the current market correction, we look at the ‘law of round numbers’ – another easily programmed trading strategy. We see that the S&P 500 rallied twice to the 2800 level (just beyond), held for one day, only to slide back to near another round number – e.g. 2700 and 2600. As we write, the index is wrestling once more with 2700. If the selling is persistent enough and the market fails to hold 2700, we would expect a drop to 2600 and a retest of the prior low in late October. On a weekly basis, 2600 has held at every selloff this year. If there’s enough selling to push down through that level for more than a few days, expect a drop to another round number.

Technical Analysis at play on S&P 500

This sort of ‘round number’ buying and selling is common in the S&P 500. Here is a weekly chart where we can see over many years how common it is for these round numbers to come into play. We’ve drawn green dotted lines at several of these levels to help you visually track this:

Boundaries made by round numbers

Technical analysis is the simple act of looking at prices to see at what levels buyers and sellers act. In particular, we are looking for changes in market behavior and at what price points those happen. Changes in the market occur when buyers become sellers and vice versa. There are certainly fundamental economic factors that come into play in these decisions. However, much of the market is driven by computer programmed buying and selling. It’s quite easy to program a computer to buy and sell at well-known levels, such as round numbers and/or well-followed reference points. As a result, we frequently see activity at these levels. The current market correction is happening in the midst of strong domestic economic growth – e.g. corporate profits are growing at record levels, in part ‘juiced’ by tax cuts, but also as a result of general revenue strength and expanding margins. While that makes it less likely we are in the throes of a full-blown bear market, we may well have witnessed the peak of this market cycle. But we may also simply be watching a wall of worry build up to provide fuel for the next rally. The above charts offer a visual look at where the selling might stop and rebounds might encounter resistance. When the market sells off, it is often the closely-watched technical levels that become critical.

Market Update

Stock investors hoped to ride a couple of weeks of positive movement and solidify the beginnings of a year-end rally. But that optimistic thought was quickly dashed Monday as the bears clawed investors once again. Stocks tumbled -2% with the market’s heaviest weighted stock, Apple (AAPL), falling -5% amid continued concerns of slowing iPhone shipments. Those concerns have pummeled semiconductor stocks and added to broader fears of a global economic growth slowdown. China-U.S. trade optimism gave stocks support early Tuesday pushing the market higher by +1% before the rally was undone by a -7% plunge in oil prices to ultimately leave the market flat on the day. Oil prices have now fallen -27% in just over a month. Another bout of weakness from Apple pressured stocks anew Wednesday sending the indexes to a -0.8% slip on the day. Financial shares were also weakened as interest rates have dropped back with investors fleeing equities in favor of bonds. Optimism around upcoming U.S.-China trade talks and a defense of Apple’s share price appeared to spark a market recovery Thursday. Apple stock received favorable comments from Morgan Stanley and, indirectly, from Berkshire Hathaway, who reported adding to their holdings of the company. Stock indexes recouped +1% as Wal-Mart (WMT) and Cisco Systems (CSCO) both offered strong earnings reports and positive guidance. As a counter-weight to those positives, homebuilders continued their abysmal year with KB Home (KBH) sliding -15% when they lowered guidance. The homebuilder ETF (XHB) is now down over -30% for the year. Stocks pushed +0.2% higher Friday, led by interest-rate sensitive groups as interest rates dropped back to where they were at September-end, prior to the stock meltdown in October. Semiconductor stocks faltered on disappointing outlooks from Nvidia (NVDA) and Applied Materials (AMAT). Retail stocks also suffered on soft guidance from Nordstrom (JWN) and Williams-Sonoma (WSM).

The volatile week ended with the S&P 500 (SPY) down -1.45% but holding support at 2700, while the small-cap Russell 2000 (IWM) slid back a similar -1.39%, also holding support at 150 on the IWM ETF. The Nasdaq 100 (QQQ) struggled with a -2.34% loss, hampered by selling in Apple and semiconductor shares.

Warm wishes and until next week.