Have Stocks Found a Bottom?

Key Points

• Stocks have bounced back after all of the indices fell into a correction.
• The large cap indices haven’t found a support, but the Russell 2000 has.
• Are we seeing a legitimate bottom, or is it a dead cat bounce?

Read the blog, with charts, here: https://www.brtechnicals.com/have-stocks-found-a-bottom-november-2018-market-environment-blog/

A Rough October

It was a rough October for stocks. The four major stock indices – S&P 500, Nasdaq Composite, Russell 2000, and Dow Jones Industrial Average – all corrected in the month. October was the worst performing month for stocks since October 2008. During the correction, a lot of key technical levels were broken.

The 200 day moving averages were broken on all four indices, and breadth analysis showed that more than 60% of stocks in the S&P 500 and Nasdaq-100 were below their own 200-day moving averages. During the correction in February, only 50% of the stocks were below their moving average. This is a sign that this correction is worse than the one earlier this year.

Enough of the major supports were broken to make me believe the S&P 500 and Nasdaq Composite were likely to hit retest the February lows. However, it seems that these indices have rebounded before reaching these levels. At first, the I thought this was a dead cat bounce, but I am not so sure anymore.

The Russell 2000

The Russell 2000 found a support at its February low, before the S&P 500 and Nasdaq Composite could reach theirs. The index has grown about 6% since reaching the support. The small cap index is usually seen as a leading indicator for the large cap stocks, so it could be a signal that stocks have come back into favor. 

To confirm this support, I analyzed other sectors and industry ETFs to determine how far away they are from their own supports. This is another type of breadth check.

My analysis shows 14 of the 21 ETFs analyzed found a support at the same time as the Russell 2000. Granted, some supports are not necessarily the strongest, but it is still a strong signal that stocks may have found a bottom in this correction. 

Moreover, the S&P 500 seems to have reversed since dropping 10%. It is possible investors jumped back into stocks after breaching the 10% mark, providing a support. However, it is not known how strong of a support it really is.

Conclusion

While this is compelling evidence of a possible bottom in stocks, I am not calling a bottom yet. There are still a number of factors weighing on stocks, and the technical damage that has occurred during the correction is extensive. I would like to see the Russell 2000 and industry ETFs fall back to the support, test it, then bounce back. Or, it would be nice to see stocks move back above their 200-day moving averages. I believe a bottom would be confirmed if more than 50% of the S&P 500 moves back above their 200-day moving average.

Submitted November 05, 2018 at 05:05PM by BR-Technicals https://ift.tt/2D3hMO6