The sellers returned to take control on Tuesday as the S&P 500 index gave up 1.4% on a down day. The index broke below the 1430 support and thus broke from the current consolidation pattern and puts the downside in play. The chart below shows the break of the up trendline, the break of support at 1430 and the 50 day moving average. Plenty of evidence with the only thing left is a confirmation close below those levels in trading today.
This raises the question of how low do we expect the index to drop from here? Since I am not a prophet, nor do I like to speculate on the outcome of market direction, I will default to technical analysis to set the target. The break from the consolidation pattern shown in the boxed area of the chart is the expected drop. 1386 is the magic number on the downside. That corresponds to the high on the index at the end of July. Thus, we set out to see how this will play out short term. I am a strong proponent of developing a belief relative market direction and then letting the chart determine if our belief is right or wrong. In this case we are looking at the downside as the evidence has built in that direction. Now one day at a time we manage the risk of being short the index. If you don’t have the personality trait to short the market, sit on the sidelines and look for the next opportunity to buy the market back in with a long play on the index.
I would like to go on record as stating that I am not negative about the market overall. The charts are directing traffic currently and the upside trend off the June low has come to an end. We now look for the next trend to develop short term. If that is down, we go with the trend. The long term trend is still on the upside off the March 2009 lows. Thus, if you are a long term investor you can ignore the above comments and focus on your stops relative to your outlook on the weekly charts. 1330 is the level to watch from the long term perspective going forward. You and I have to define our investment perspective relative to the trade we are in currently, and mange the risk accordingly.
The NASDAQ index has been a different index to watch since the high in September. The index formed more of a double top in early October and failed to make a new high or even challenge the 9/14 high. The break of support off the 10/4 high near 3100 was a short term exit point or stop. Since then the third attempt or bounce to move higher established the current short term downtrend with a high low to go with the sequential lower lows. The short set up for the trade was on the break of the 3037 support level. That downside move is still in play. The break below 3000 on Tuesday shows the acceleration of the move lower. Now you need to watch the 200 day moving average as potential support. The cause or aide to the downside movement for the index was the weakness in the technology sector which was the leader on the downside move. The semiconductors started the weakness with a break of support in early September. This has been developing slowly over this time period. The key is patience in letting trends and trades develop.
As we start a new day of trading watch how these two indexes play out… not just today, but going forward relative to the belief the downtrend is now in play. We will need a shift in sentiment and the buyers will have to return with a conviction that the outlook is changing for the market to return to the uptrend going forward. Otherwise we take what the market gives on the downside.
If you are have not yet taken advantage of Joining Jim’s Notes as a subscriber, now is a great time to start and learn how to manage money during good and bad market trends. If you missed our Webinar Tuesday Night on “Managing Money in Today’s Market” we have posted the archive of the meeting. It is only available for a limited time, so take advantage of the opportunity to learn more about managing market risk. Look for the link HERE or on the home page or email Don@SectorExchange.com.
Make it a Great Day!