As Europe begins to shut down again and fears the COVID-19 infections spreading across the U.S. into flu season, it is reasonable to expect investors and trades to be nervous. One day before the election, the speed and sharpness of the recent correction suggest the stock market is moving toward a turning point, at least from a near-term technical perspective.
Although the volatility may expand like the prior presidential election nearly four years ago, or like the Brexit-like scenario where the futures collapse and rally significantly higher soon afterward, the technical picture hints of the recent selling may be reaching a near-term bottom.
Two technical studies offer signs of a near-term trend reversal is imminent. The daily Bollinger Bands chart, as well as the short-term intra-day chart of a 4-day technical base, suggests the recent selling is nearing an end rather than the start of the sell-off. It is difficult to determine with any accuracy if the bottom has already occurred or whether another round of selling will soon develop but if history is a sign of the future then this sell-off is likely to be resolved sooner than later.
Enclosed below is the daily Bollinger Bands chart of the S&P 500 Index (SPX). Pay close attention to the accompanying technical indicators such as Bollinger Bands width, MACD price momentum, and RSI. They may offer subtle technical clues to an SPX turning point. Also attached is the intra-day chart of SPX. Despite the uncertainties in the marketplace, the recent sharp jump in the VIX Index appears to be subsiding. The MACD price momentum indicator is also attempting to break out of a short-term technical base.
Over the past four trading days, a short-term technical base is developing between 3,233.94 (10/0/20 low) and 3,341.05 (10/29/20 high). The technical base is 107.11 points. A breakout above 3,341-3,354 (the top of the base and 38.2% retracement from 10/12/20 to 10/30/20 decline) suggests the start of a turnaround. On the other hand, a violation of 3,209.45-3,233.94 (9/24/20 and 10/30/20 lows) warns of the next SPX decline.