Stocks Are Nearing Bounce Territory

by Serge Berger | August 22, 2013 9:30 am

Last Tuesday, I said that after such a steep year-to-date run in stocks, a correction of 5% to 10% would be nothing unusual[1] nor anything that longer-term investors would need to concern themselves too much with. Two days later, stocks snapped an important near-term support line.

Fast-forward six trading days to today, and the S&P 500 is now 3% lower on a daily closing basis, marking the entire move off the Aug. 2 highs at just a tad over 4%.

However, from a technical point of view, the S&P 500 is now nearing a first better support area, which is marked by the 50% retracement of the entire June/July rally, as well as the 100-day simple moving average (blue line on the below chart). Given the broader topping indications in equities — at least for the next two months — this is no time to catch falling knives unless you’re the quickest of traders.

SPXdailyandATR Stocks Are Nearing Bounce Territory
Click to Enlarge

In the grander scheme of things, whether the S&P 500 “correction” ultimately halts at 1600 or 1560 hardly matters for those in the market for the longer-term because, hey … the index was trading below the 1600 mark as recently as late June.

Through a trading lens, however, playing potential downside toward 1600 or 1560 is a rather juicy trade that not many traders will leave untouched. The quicker traders might find better levels to enter short-side trades in coming days or weeks, once an oversold bounce takes place. Note also on the above chart that the daily gyrations in the index have widened as the average true range is on the rise.

For its part, the Dow Jones Industrial Average has corrected 777.59 points, or 4.9%, from its Aug. 2 intraday high to yesterday’s intraday low.

DowIndustrials Stocks Are Nearing Bounce Territory
Click to Enlarge

This index also is oversold in the near-term and could bounce soon. Ultimately, better support is the upsloping neckline (black) that currently sits near 14,680. Likewise, an eventual break below this level would have further bearish implications.

Serge Berger is the head trader and investment strategist for The Steady Trader[2]. Sign up for his free Weekly Market Outlook Video here[3]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. a correction of 5% to 10% would be nothing unusual: http://investorplace.com/2013/08/stop-fretting-about-a-market-correction/
  2. The Steady Trader: http://thesteadytrader.com/
  3. free Weekly Market Outlook Video here: http://www2.marketfy.com/l/15492/2013-05-06/4sf47

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