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Profit Taking or Something More?

The market suffered sharp losses on heavy volume. US stocks book one of the worst daily losses since October 2020. Some blame the sell-off on concerns about market euphoria and the recent trading frenzy from speculative stocks such as GM, AMC, etc. Others suggest the above-average volume trading and the sudden spike in the implied volatility (VIX) hints of institutional investors locking in profits. Many point to the FED's gloomy remarks about the economy and the COVID-19 pandemic. Some believe the selling is due to the nervous investors selling stocks ahead of the earnings reports from several mega-cap Technology stocks.


So, is today's market sell-off just another round of profit-taking, or is this the start of something more?


From a technical perspective, US stock market indexes started the week with bullish 2-plus month uptrend channels. However, today we witnessed large gap-down patterns across the board. In some market indexes, they were second gap downs for the month. We suspect this is yet another much-needed consolidation since the primary intermediate-to-long term trends remain bullish. We also realize the rally over the past 2-plus months has created an overbought market, and to alleviate an overbought market condition, it would be technically healthy for the market to pullback and backing-and-fill before resuming its uptrend.


Attached below are the near-term technical views of the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and Nasdaq Composite Index (COMPQ).


S&P 500 Index (SPX – 3,750.77)


Since Nov 2020, SPX has trended higher via a 2-plus month uptrend channel between 3,732-3,738 and 3,883-3,900. Since the height of the channel is 168-points, a convincing breakout above 3,900 renders an SPX target to 3,928-3,967 (triangle breakout target), and then to 4,068 (channel breakout target). However, the failure to clear above the top of its uptrend channel at 3,870.90 (1/26/21), coupled with an overbought condition and two recent gap-downs (1/15 and 1/27/21), suggests a near-term consolidation. Initial support is 3,710-3,732 (50-day ma and bottom of its channel). A breakdown warns of a correction to 3,627.5-3,663 (Dec 2020/Jan 2021 lows and the 38.2% retracement from Oct 2020 to Jan 2021 rally), and below this to 3,552-3,564 (channel breakdown downside target and the 50% retracement), and then to 3,477-3,484 (61.8% retracement and 11/6/20 low). Under strong selling, SPX can retest intermediate-term support at 3,340.5 (200-day ma) and below this to 3,233.94 (10/30/20 low).


Dow Jones Industrial Average (INDU – 30,303.17)


The blue-chip Dow Jones Industrial has weakened as it is nearing a technical breakdown below its 2-plus month bullish uptrend channel between 30,362-30,644 and 31,457-31,628. The height of the channel is 1,266 points. A breakout above 31,395 would have triggered the next INDU rally to 32,255 (triangle breakout target) and then 32,894 (channel breakout target). However, a recent negative outside day (1/14/21), and two gap-downs (1/15/ and 1/27/21 lows) warn of a consolidation. Violation of 30,295-30,362 (bottom of the channel and the 50-day ma) confirms a channel breakdown and suggests the next correction to 29,312/29-755.5-29,882 (38.2%retracement from the Oct 2020-Jan 2021 rally and the Dec 2002/Jan 2021 lows), and below this to 28,707-29,086 (50% retracement and the channel breakdown downside target), and then 28,102 (61.8% retracement). The 200-day ma at 27,513 remains intermediate-term support.


Nasdaq Composite Index (COMPQ – 13,270.60)


The Nasdaq Composite Index (COMPQ) retains its 2-plus month uptrend channel between 13,093-13,187 and 13,696-13,802. There is also a gap-up (1/25/21) and a positive outside day (1/25/21). The height of the channel is 709-points. A breakout above 13,802 still suggests a COMPQ target of 14,511. A moderately overbought condition coupled with a gap-down (1/27/21) on heavy volume warns of a consolidation. The next key support is at 13,093-13,187 (bottom of the channel). Violation here warns of a correction to 12,543-12,668 (Jan 2021 lows, 38.2% retracement from Oct 2020-Jan 2021, and the 50-day ma), and below this 12,279-12,384 (50% retracement and the channel breakdown downside target), 12,217-12,215 (Dec 2020 lows), and 11,935.5 (61.8% retracement). Intermediate-term support remains at 10,994 or the 200-day ma.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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