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What are the Downside Risks?

It has been 12 trading days since the market peak. Stocks ended the day lower to start the week. The S&P 500 Index (SPX) slipped another 38.41 points or -1.16%. The Dow Jones Industrials Average (INDU) also fell 509.72 points or -1.84%. The NYSE Composite Index (NYA) declined 271.79 or -2.12%. The broader-based Nasdaq Composite Index (COMP) dropped 14.48 or -0.13%. Interestingly, the narrowed-based Technology heavy Nasdaq 100 Index (NDX) managed to rally into the close with a gain of 43.24 or +0.40%.


Although stocks suffered another sharp selloff it avoided a much deeper setback today as the large-cap technology names staged a rally into the close as evidenced by the NDX positive gain today.


So, the question then becomes – is this the beginning of the end of the selloff or is there more selling to come?


We continued to closely monitor for the widely discussed rotation from the high-growth and momentum-based sectors and stocks toward other cyclical and value-related sectors and stocks. But it appears that today’s selloff did not confirm a strong rotation into other economically sensitive and value related areas of the marketplace. This is a negative as you would need to see sustained sector rotation to substantiate the next major stock market rally.


Technically speaking, analyzing the market internals, overbought/oversold indicators, money flows, and rotations it appears the market may need to decline further before the selling finally subsides. The market will likely continue to experience higher than normal volatility into the end of the month which also coincides with the end of the third quarter. However, at the current pace of the selling, we would not be surprised to see sellers begin to capitulate as the markets fall toward the key technical levels.


The pertinent question now becomes – what are these key technical support levels, and most importantly, how much more risks before the market begin to stabilize?


Attached below are the next key technical levels for SPX, INDU, NYA, COMP, and NDX. As with many key technical levels, the stronger supports often coincide with the confluence of important technical indicators and some technical indicators are stronger than others.


We recommend investors and traders focus on the pivotal 200-day ma as well as the 38.2% retracements. If they converge at or near similar levels, then this becomes an important support zone. Why? Electronic trading, computer-generated, risk arbs, Algo trading, quant models, technical driven models will all be watching for the same support levels.



Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


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