U.S. stocks closed moderately lower last week, which on the charts resulted in some key initial moving averages being violated. While this does not mean the bottom is about to fall out from stocks, as the pullback has been of typical garden variety thus far, sound risk management does have to be applied as we take it day by day, week by week.
Before looking at some charts and as a reminder; It’s the dead of summer on Wall Street and despite turbulence in Washington, the broader stock market is holding up and trading in a choppy sideways move.
From a trading perspective, as I have laid out in this column over the past couple of weeks, less is more. Take a step back from this choppy tape for the time being, for it is better to miss an opportunity than to have to dig yourself out of a string of unnecessary losses in a low probability and choppy stock market environment. Think about it.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Last Monday, Aug. 14 in this column, I said that the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) have both dropped toward their 50-day simple moving averages and that this could easily lead to more weakness.
Well, by the end of last week, the SPY ETF broke below this moving average and the QQQ is hanging on by a thread.
While the currently choppy stock market is arguably one positive headline away from another leg higher, all else being equal the SPY ETF does now point lower for a possible re-test of its red 200-day simple moving average, currently residing around the $235 area, or approximately 3% lower from last Friday’s closing levels. So you know, the last time the S&P 500 re-tested its 200-day moving average was in early November 2016.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Last week on Thursday, the small capitalization stocks as represented by the iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT) broke below its 200-day simple moving average for the first time since briefly doing so in June 2016. This here too does not mean the bottom will fall out but does argue for lower prices ahead, possibly another 3% lower.
The Chop Continues for Small-Caps
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
In terms of small-capitalization stocks as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), last week I offered that they too had reached a key area of support (up-trend line as well as the red 200-day simple moving average) and that absent a strong bullish reversal “it in my eyes simply is too early to buy and a next downside target around $130-$132 could come into play.”
Last week the IWM ended up snapping its 200-day moving average, which how initially targets the $129-$130 area and would constitute about a 3%-4% slide from last Friday’s closing levels.
In summary, we currently find ourselves in a choppy August trading period where a less is more approach will likely be rewarded. While some more weakness in stocks looks likely, from a trading perspective any strong one or two-day bullish reversals could quickly lead to another more meaningful bounce.
Check out Serge’s Trade of the Day for Aug. 21.
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.
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