Stocks can go down, and it now looks like they will. The market, as measured by the Standard & Poors 500 Index ($SPX) continued to rise at a dizzying pace until the Fed meeting ended on Wednesday. Now stocks are taking on a more bearish tone.
Typically, the market pulls back to at least the 20-day moving average in these situations, and usually overshoots that target. Currently, that 20-day moving average is at 1725.
For some reason, traders seemed to take the benign Fed meeting announcement as negative. At least they sold after the meeting ended. That’s the fourth time this year that a Fed meeting has induced selling, and in the previous instances, the selling continued for a while – weeks, in some cases.
From mid-morning just two weeks ago (October 9th) through Tuesday's close, the Standard & Poors 500 Index ($SPX) rose 115 points. That is impressive, but the advance has been so swift that it has created a number of overbought conditions that are on the brink of becoming sell signals. $SPX has support at 1730 and 1700.
Equity-only put-call ratios have rolled over to buy signals.
The volatile moves this week have given rise to a number of new trading signals. Since some are in conflict with others, one has to make a choice as to how to approach them.
$SPX sold off sharply and recovered sharply and is now more or less where it was just over a week ago. An $SPX close above 1695 would likely pave the way for another attempt at the all-time highs of 1730, which is also resistance.
...The speed of this market is being accurately reflected in our indicators, I believe. What seemed to be an extremely bearish environment just a couple of days ago, now appears ready to reverse to buy signals in at least some areas. Since the equity-only put-call ratios remain on sell signals, it does not appear that an overall “all clear” will be sounded, but there is upside potential in these short-term buy signals – should they be confirmed...
The broad market is rather schizophrenic right now. On Friday, the prevailing attitude seemed to be “I better buy now before Congress settles this thing and the market explodes.” On Monday, it was more like “I better sell now, because I’ll be able to buy later as this thing drags on” (“This thing” being the Congressional deadlock over the budget and the debt ceiling).
The market is getting more volatile and bearish as the combined pressures weigh upon it. These include the Congressional wranglings, the negative seasonality of early October, and the technical deterioration of our indicators.
The Standard & Poors 500 Index ($SPX) has support at 1660-1670 and at 1630 below that. There is resistance at 1730.
$SPX now has resistance at the mid-September highs of 1730. There is support at 1680, 1660, and then at the August lows of 1630. This week, $SPX generated a sell signal, based on a recent overbought condition.That is one of the few confirmed sell signals.
$SPX exploded to the upside after the Fed's announcement that they were not going to taper, with both new buying and short covering entering into the fray. With $SPX now at new all-time highs, it has positive momentum, but is also extremely overbought. This latter condition will eventually lead to some sell signals, but perhaps not right away.
The Fed’s announcement that they were not going to taper was a big sigh of relief for many traders, and the resulting buying explosion was powerful. Short covering was certainly prevalent as well. $SPX and other major indices blasted through to new all-time highs. In doing so, there were a number of overbought conditions that were triggered, but on such a powerful breakout, an overbought condition is actually conducive to higher prices – for a while.
