Be Ready to Eject, But Don’t Pull the Trigger Yet

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Stocks plunged Friday, with the S&P 500 down 3.2% to levels of late October 2014. This put the weekly decline to 5.8% for the S&P 500, but the Nasdaq’s fall of 3.5% put its weekly decline at 6.8% and its fall since its high in July at 9.8%, just shy of what is considered a “correction.”

The catalyst for the selling appeared to be a rout on the Shanghai Composite as it fell 4.3%, extending its weekly decline to 11.2%. All 10 of the S&P’s sectors fell with technology and consumer discretionary sectors down 3.8% and 3.2%, respectively. Even healthcare, traditionally a defensive sector, fell 3%.

But technology led the way lower with key tech stocks like Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), and Microsoft Corporation (NASDAQ:MSFT) having paced the decline, off between 3.5% and 5.9%. The discretionary sector was also in decline with Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) down 4.1% and 7.6%, respectively.

Crude oil fell for the eighth consecutive week, off 6.2%. Black gold closed at $40.45 per barrel, while yellow gold rose 0.58% to $1,159.90 per ounce.

The New York Stock Exchange’s volume, which approached 1.4 billion shares, was high but substantially impacted by the expiration of August stock options.

At the close, the Dow Jones Industrial Average fell 531 points at 16,460, the S&P 500 lost 65 at 1,971, the Nasdaq fell 171, closing at 4,706, and the Russell 2000 closed at 1,157, down 16 points. The NYSE’s primary exchange traded almost 1.4 billion shares, with total volume approaching 5 billion shares, and the Nasdaq crossed 2.7 billion shares. On the Big Board, decliners outpaced advancers by 5.6-to-1, and on the Nasdaq, decliners led by 2.4-to-1.

For the week: The DJIA fell 5.8%, the S&P 500 lost 5.7%, Nasdaq fell 6.7%, and the Russell 2000 was down 4.6%.

SPY breakdown
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Chart Key

The SPDR S&P 500 ETF (NYSEARCA:SPY) shows a breakdown from support at $206. The break of 4.4% was accompanied by higher-than-normal volume. However, the high volume may have been the coincidental expiration of August options and the more fundamental problem in China.

The close on Friday, again coincidentally, was almost smack on a support line at around $197, which is the double bottom established in December and February. MACD is now more oversold than at any time since last December.

nasdaq breakdown
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The Nasdaq Composite has held up better than the major indices, and its current chart — though ugly — has not broken down as much as the S&P 500’s. Its MACD is also oversold, and like the S&P 500, it too, had a CBR Buy on the February reversal.

SPY ETF
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Our trusty chart of the S&P 500’s 17-month moving average has triggered the first sell signal since 2011. In 18 years it has issued sells five times, of which two were reversed back to buys (’98 and ’11), but two (’01 and ’07) signaled the beginning of major bear markets.

But both buy signals took some time to adjust — one month for the ’98 and two for the ’11.

Conclusion

Michael Gibbs, director of technical analysis at Raymond James, has concluded that the present “correction” will meet the minimum definition of “correction,” but not by much. He bases this on a case for a price-to-earnings ratio near 16.5 for the S&P 500, which would put the index at approximately 1,950. That’s about another 1% from Friday’s close, and I think it likely (depending on any further nasty surprises from China) that either Friday’s closing low or a lower opening today will establish a bottom.

The CBOE Volatility Index, or VIX (not shown), jumped to a close of over 28, up from 14 in just three days, indicating that investors are finally scared to death. And when they are this emotional, bottoms are made.

But what of our 17-month chart? Our trusty long-term chart flashed a “sell” last week, but as accurate at this tool has been, it is not perfect, reversing itself twice out of five sell signals. Incidentally, it has never reversed from a “buy.” And, even though I place significance on the signals of this chart, I would caution against depending on one signal from any formerly reliable source for total guidance.

Since much depends on the decisions of a untrustworthy source — the government of China — and our indicators are now very oversold, we will wait for further confirmation of a new bear market before washing out our long-term positions.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/be-ready-to-eject-but-dont-pull-the-trigger-yet/.

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