Levels to Watch

End of Day Update:

The S&P500 slipped under 2,020 support Wednesday, reversing from early gains. Volume was below average, telling us that not a lot of owners were worried by this 0.6% loss. That can be a good or bad thing depending on how you choose to read it. The bullish interpretation is confident owners create a solid foundation when their stubborn resolve keeps supply tight. However bears will remind us that capitulation reversals happens on high volume. The last couple of days of light volume means we haven’t shaken the tree very hard. A fair number of weak owners are still hanging on and could easily turn into nervous sellers if we slip any further.

This was only the fifth downday since late September. Over that breathtaking stretch, we surged nearly 150-points and recovered more than half of August’s selloff. Seeing a little red on Tuesday and Wednesday is not unexpected or a bad thing. Everyone knows healthy markets take periodic steps back and is most likely what this is. The only questions are when, how long, and how much.

Technicians often spot 38% and 62% retracements of the prior move (Fibonacci). Applied to our 150-point move, that would be a 57 or 93 point pullback. Currently we’re only 20-points from the recent highs, meaning there is plenty of additional room to fall. Unfortunately the 38% and 62% values are only valid from the top of the move and we won’t know until after the pullback where the actual top was. While this method cannot tell us when the market will peak, it gives us an idea of the magnitude of pullback we should expect. A 20-point dip doesn’t come close, so either we haven’t finished sliding, or 2,040 isn’t the top. In a few days we will have our answer when we keep slipping, or bounce and continue higher.

We are quickly moving into earnings season and that is taking the focus away from Asian and European markets. While there isn’t a lot to get excited about by our sluggish earnings, at least we are no longer being held hostage by overseas stock markets. The challenge with interpreting earnings is anticipating the market’s reaction. It was fairly comical when Wednesday morning’s headlines told us stocks were up on encouraging earnings, while later in the afternoon the same financial journalists blamed the selloff on disappointing earnings.

With so many companies reporting, traders can find plenty of evidence to prove whatever bias they harbor. If they are looking for an excuse to sell, they will find it. If they are looking for a reason to buy, there will be plenty of justifications. This means the mood of the market is far more important than the actual results. After such a strong run, it seems like those with cash are taking a half-full view of the situation. The last few days we’ve run into resistance every time the market pushed up against 2,040. This shouldn’t be a surprise since this provided support through most of 2015. What is support often turns into resistance that appears to be the case here. Real or self-fulfilling, those with cash don’t want to chase stocks higher than 2,040 and that lack of demand is keeping a lid on prices.

What does this all mean? If earnings come in as expected, then a pullback to the 50dma would be healthy and represent a good buying opportunity. On the other hand, if key earnings start missing badly, then the global selloff will flare up and we could easily undercut recent lows. Finally, if we blow past 2,040 resistance, there isn’t a reason to chase the breakout since we know a 60-point pullback coming. Let the market peak and then come back to you.

Jani

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