The stock market is experiencing wide fluctuations, but the technical picture is still confused. Make sense of a volatile market.
The stock market is experiencing big swings, but the technical picture is still confused. Make sense of a volatile market.
The stock market experiences great fluctuations, but they occur in a very wide range. As long as this is the case, the movements are most likely noise.
The Dow Jones Industrial Average gained nearly 1,200 points on Wednesday, a sharp turnaround after falling nearly 800 points on Tuesday. We try not to be too excited.
Yes, the Bourse is organizing a major rally. The Dow Jones and the S&P 500 both ended the day up over 4%. You will hear many reasons why the market is so much up, ranging from Joe Biden’s strong performance in the Super Tuesday primaries to a delayed response to the Federal Reserve rate cuts. Most recently, stocks have increased after Congress agreed to $ 8.3 billion in funding to fight the coronavirus.
But when the markets are trading as wildly as they have been, I tend to fall back on technical analysis, which helps us digest where the market has been – and where it could go. This morning, when the Dow Jones opened more than 700 points before settling with a gain of 500 points, it did not seem that the movement would matter. This is because it was happening within a fairly well established range. The S&P 500 had resistance around 3120 and support around 2865. For the Dow, the range seemed to be between 24,700 and 26,900, give or take. Even with indices up 2%, there seemed to be no danger of resistance breaking.
https://asset.barrons.com/dynamic-insets/charts/cdc_eb2d577e6ebb639b438ce675.json
The fact that the market rebounded on Wednesday shouldn’t have come as much of a surprise. Tom Lee of Fundstrat, citing data from Lowry, notes that more than 90% of S&P 500 stocks trade below their 10-day moving average for six consecutive days. This has only happened four times in the past 12 years, and in each case the market has grown five days later with an average gain of 6.3%. “In our opinion, the conclusion is that the stocks have reached a point where a large and sustained rally has historically taken place,” writes Lee.
Before Wednesday’s rally, some technicians were looking for historical precedents for the type of volatility we know. For his part, Rich Ross, technical analyst at Evercore ISI, proposed the market correction that occurred in 2015 and 2016 as a possible analog. At the time, the stock market fell once in August 2015 when China devalued its yuan, then again in early 2016 when oil prices fell below $ 30.
https://asset.barrons.com/dynamic-insets/charts/cdc_b826cab8f42376edd2c9f07f.json
“While market analogs do not repeat” with past periods, the key to remember is that stocks are likely to “cut” in the coming weeks as we try to build a better foundation for a more sustained resumption of the trend, “writes Ross.
The nasty rally, however, complicates matters, forcing us to look for other precedents, in particular because the S&P 500 seemed to be approaching resistance. This can be debated. John Kolovos, of Macro Risk Advisors, told Barron that closing the S&P 500 above 3100 is more of a psychological drag given its round number. “I am looking higher to test the bulls. Closer to 3200-3250! “
Others see more bullish patterns in the chart. For example, a bearish head and shoulder movement that was forming was canceled out by Wednesday’s move, writes Frank Cappelleri of Instinet, and a bullish pattern could form. “If sustained, this upward objective counts for 3,350,” he noted.
But even that may not yet mean that the market has come out of the woods. Cappelleri notes that the last time the S&P 500 posted two 4% gains within two days of each other was on August 9 and August 11, 2011, following the downgrade by S&P of the rating of credit from the United States. “Months of continued volatility then followed, which we cannot overlook this time either,” writes Cappelleri.
This makes sense given the threat to the market. The coronavirus could end up being a tragedy for thousands of people but having a limited impact on the market, in which case a major rally would be in sight. On the other hand, the spread could cause major disruptions to the US economy, leading to a recession and a bear market. Or something in between.
It may sound obvious, but today is the best I have.
Write to Ben Levisohn at [email protected]
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The stock market is experiencing wide fluctuations, but the technical picture is still confused. Make sense of a volatile market.
The stock market is experiencing big swings, but the technical picture is still confused. Make sense of a volatile market.
The stock market experiences great fluctuations, but they occur in a very wide range. As long as this is the case, the movements are most likely noise.
The Dow Jones Industrial Average gained nearly 1,200 points on Wednesday, a sharp turnaround after falling nearly 800 points on Tuesday. We try not to be too excited.
Yes, the Bourse is organizing a major rally. The Dow Jones and the S&P 500 both ended the day up over 4%. You will hear many reasons why the market is so much up, ranging from Joe Biden’s strong performance in the Super Tuesday primaries to a delayed response to the Federal Reserve rate cuts. Most recently, stocks have increased after Congress agreed to $ 8.3 billion in funding to fight the coronavirus.
But when the markets are trading as wildly as they have been, I tend to fall back on technical analysis, which helps us digest where the market has been – and where it could go. This morning, when the Dow Jones opened more than 700 points before settling with a gain of 500 points, it did not seem that the movement would matter. This is because it was happening within a fairly well established range. The S&P 500 had resistance around 3120 and support around 2865. For the Dow, the range seemed to be between 24,700 and 26,900, give or take. Even with indices up 2%, there seemed to be no danger of resistance breaking.
https://asset.barrons.com/dynamic-insets/charts/cdc_eb2d577e6ebb639b438ce675.json
The fact that the market rebounded on Wednesday shouldn’t have come as much of a surprise. Tom Lee of Fundstrat, citing data from Lowry, notes that more than 90% of S&P 500 stocks trade below their 10-day moving average for six consecutive days. This has only happened four times in the past 12 years, and in each case the market has grown five days later with an average gain of 6.3%. “In our opinion, the conclusion is that the stocks have reached a point where a large and sustained rally has historically taken place,” writes Lee.
Before Wednesday’s rally, some technicians were looking for historical precedents for the type of volatility we know. For his part, Rich Ross, technical analyst at Evercore ISI, proposed the market correction that occurred in 2015 and 2016 as a possible analog. At the time, the stock market fell once in August 2015 when China devalued its yuan, then again in early 2016 when oil prices fell below $ 30.
https://asset.barrons.com/dynamic-insets/charts/cdc_b826cab8f42376edd2c9f07f.json
“While market analogs do not repeat” with past periods, the key to remember is that stocks are likely to “cut” in the coming weeks as we try to build a better foundation for a more sustained resumption of the trend, “writes Ross.
The nasty rally, however, complicates matters, forcing us to look for other precedents, in particular because the S&P 500 seemed to be approaching resistance. This can be debated. John Kolovos, of Macro Risk Advisors, told Barron that closing the S&P 500 above 3100 is more of a psychological drag given its round number. “I am looking higher to test the bulls. Closer to 3200-3250! “
Others see more bullish patterns in the chart. For example, a bearish head and shoulder movement that was forming was canceled out by Wednesday’s move, writes Frank Cappelleri of Instinet, and a bullish pattern could form. “If sustained, this upward objective counts for 3,350,” he noted.
But even that may not yet mean that the market has come out of the woods. Cappelleri notes that the last time the S&P 500 posted two 4% gains within two days of each other was on August 9 and August 11, 2011, following the downgrade by S&P of the rating of credit from the United States. “Months of continued volatility then followed, which we cannot overlook this time either,” writes Cappelleri.
This makes sense given the threat to the market. The coronavirus could end up being a tragedy for thousands of people but having a limited impact on the market, in which case a major rally would be in sight. On the other hand, the spread could cause major disruptions to the US economy, leading to a recession and a bear market. Or something in between.
It may sound obvious, but today is the best I have.
Write to Ben Levisohn at [email protected]
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.