Start of Another September Correction or Something More?
Technology, Communication Services, and high momentum stocks suffered the worst drop since 6/11/20. This droved the rest of the stock market sharply lower by the end of the day. SPX closed down 125.78 points or -3.51%, INDU lost 807.77 points or -2.8%, and the COMPQ plummeted 598.34 points or nearly -5%. The declines came just a day after SPX and COMPQ recorded new record highs. It was the 22nd such record close of the year for SPX and the 43rd all-time high for the COMPQ.
So what drove the market down today?
Some blame the sell-off on the deteriorating US-China relationship. Others point to the gridlock on Capitol Hill as it relates to the next stimulus bill. Yet many more points to the lack of clarity as to when the Covid-19 vaccine will become available. There was simply no single catalyst (news or otherwise) for today’s sell-off. Nonetheless, it was sudden and dramatic coming ahead of the 3-day Labor Day Weekend.
From a technical perspective, it appears today’s stock market selloff resembles the start of a technical correction to alleviate a widely overbought market condition. Although the selloff could be an indication of worse things to come, the lack of a broad selling across all sectors hints that it may be the unwinding of hot money locking in profits in momentum-based areas ahead of the long weekend.
During down days where other sectors such as Energy, Financials, Consumer Staples, Healthcare held up relatively well tend to suggest sector rotations and portfolio rebalancings, and not widespread panic selling that is often associated with major market tops. The lack of strong selling outside the high tech and momentum-based areas of the marketplace is healthy for the overall market as this suggests investors/traders are still active in the stock market. The sector rotations and portfolio rebalancings can help to reset the marketplace, and most importantly to prevent speculative forces from escalating into a stock market bubble.
So, now what?
Tomorrow morning we will get another monthly US labor market release. This job report for August may influence the marketplace, at least from a near-term perspective. Also, remember weak seasonality tendencies and an uncertain US Presidential Election may lead to volatile swings, both to the upside as well as to the downside.
Attached below are updated technical levels for key market indexes. Note that the 50-day ma and the 38.2% retracement levels can often act as crucial near-to-medium term supports under normal corrections. Under strong selling, there is a tendency for key market indexes to gravitate toward their 200-day moving averages and the 50-61.8% retracements.
S&P 500 Index (SPX – 3,427.41)
Resistance 1 = 3,588.11 (9/3/20 all-time high and the top of the 2018 broadening pattern)
Support 1 = 3,393.52-3,413 (V breakout and 8/24/20 gap up)
Support 2 = 3,233-3,292 (7/20/20 breakout and 50-day ma)
Support 3 = 3,054-3,091 (38.2% retracement and 200-day ma)
Support 4 = 3,022-3,028 (10/28/20 breakout)
Support 5 = 2,890-2,966 (50% retracement and 6/12/20 low)
Support 6 = 2,822-2,856 (Aug/Oct 2020 lows)
Support 7 = 2,725-2,729 (61.8% retracement and 6/3/20 low)
Dow Jones Industrial Average (INDU – 28,292.73)
Resistance 1 = 29,199-29,568.57 (9/3/20 and 2/12/20 all-time high)
Support 1 = 27,959.5-28,042 (8/24/20 gap up)
Support 2 = 27,580 (6/8/20 breakout)
Support 3 = 27,059 (50-day ma)
Support 4 = 26,302 (200-day ma)
Support 5 = 24,843-25,011 (38.2% retracement and Jun 2020 lows)
Support 6 = 23,354-24,060 (5/18/20 gap up and 50% retracement)
Support 7 = 22,415-22,790 (61.8% retracement and 5/14/20 low)
Nasdaq Composite Index (COMPQ – 11,458.10)
Resistance 1 = 12,074.06 (9/2/20 all-time high)
Support 1 = 11,220 (bottom of Apr 2020 uptrend channel)
Support 2 = 10,748-10,832 (8/3/20 gap up breakout and 50-day ma)
Support 3 = 10,217-10,222 (7/2/20 breakout)
Support 4 = 9,838-9,995 (Jun 2020 V-breakout and 38.2% retracement)
Support 5 = 9,358-9,353 (50% retracement, Jun 2020 lows, and 200-day ma)
Support 6 = 8,705-8,710.5 (5/14/20 low and 61.8% retracement)