Key Points
- This past week was rough on the stock market as interest rates spiked. We assess the technical damage.
- The damage is fairly severe, especially in the current U.S. economic environment. 200-day moving averages have broken, and so have major trendlines.
- Momentum has moved to the downside. Breadth analysis shows stocks and the major averages are weakening.
You can read the full blog and see the charts here: https://www.brtechnicals.com/analyzing-last-weeks-technical-damage/
It was a rough week for stocks, and there is a lot of technical damage to assess.
The S&P 500
The index fell in January, after a historic 2017, as sentiment grew too high. Eventually, the index found a bottom and the index started to make its way towards the previous high. Unfortunately, it was the defensive sectors pulling the market higher. This was our first clue that there could be trouble ahead.
While the index did make new all-time highs, momentum had been falling. This was another sign of weakness. However, the index did make a breakout, and momentum could have been reset, if the index fell back towards the previous peak, and bounced back up, as is typical with new breakouts. Alas, this did not occur.
The breakout failed, and the index fell below the January peak. There was still a thought that the index could find a quick bottom, as there was still the uptrend line and 200-day moving average to act as supports.
Early on Thursday morning (10/11), it looked like the support had come in. The index began the day negative, but quickly moved up after falling below the 200-day moving average. Unfortunately for the bulls, they could not muster up enough strength to keep the index higher, and both the 200-day moving average and trend were broken.
RSI fell below the oversold threshold, and MACD had turned negative. Based on these indicators, momentum has shifted to the downside.
Nasdaq Composite
The Nasdaq Composite first started seeing signs of trouble when breadth showed a clear weakening trend. This recent drop has also broken two strong supports: the trendline and the 200-day moving average. Like the S&P 500, the RSI is oversold, and MACD is negative, telling us there is momentum behind the selling.
Right now, the current target for the Nasdaq Composite is 6,800, as the index looks like it will continue to struggle. However, it is unknown whether the support will hold the index, or if it will only be a bump in the road on the way towards a bear market.
The Russell 2000
The Russell 2000 index gives another example of a failed breakout. Shortly after breaking to new highs from a small symmetrical triangle (green lines), the index fell hard and fast.
This has been the weakest index, as it has fallen more than 11% since September 1. Much like the S&P 500 and Nasdaq Composite, this index has broken the 200-day moving average and a minor uptrend.
Currently, the index is testing a long term channel trendline which could support the index, but the trendline has already been pierced. If the index continues to fall and we can confirm the support has failed, it opens the index to a lot more selling pressure.
Breadth Analysis
Less than 20% of stocks are above their 50-day moving average in the S&P 500 and Nasdaq Composite. This could be a sign that the selling is over-done, and that sentiment has reached an extreme low.
This is a reasonable conclusion to come to in a bull market, but when you look at the stocks above their 200-day moving average indicator, that conclusion is much different.
More than half of the stocks have fallen below their 200-day moving average for the first time since 2015. This long term indicator tells us that there is momentum behind this sell-off, and that it is likely to continue.
At best, we can hope stocks behave like 2015, where prices traveled within a range, and the indices will find a close bottom. Otherwise, the selling may continue into a bear market.
Submitted October 15, 2018 at 04:13PM by BR-Technicals https://ift.tt/2AbS740
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