Respect Last Friday’s Selloff in the S&P 500. Don’t Fear It.

by Serge Berger | January 27, 2014 9:51 am

Make no mistake: Last Friday’s selloff in the S&P 500 and other risk assets is not to be ignored.

But before I walk you through some charts and facts, I’d also like to say that I don’t foresee big doom or gloom around the corner, either. And certainly not a new financial crisis.

From where I sit, we are coming to the end of a cyclical bull market in U.S. stocks, but remain in the early innings of a fresh secular bull market.

In 2013, investors and traders were trained to buy the dips — and I mean every single dip — regardless of how shallow. However, in 2014, five years into a rip-roaring bull market for stocks, things likely will get a little choppier, and 10%-20% corrections are most certainly possible. If we are coming toward the end of a cyclical bull market — and after five years, by historical measures, we are in an extended cyclical bull market — then a marginal increase in volatility and an eventual pullback of 15% to 20% is nothing but normal and necessary.

In terms of economic data, the upside momentum of recent months has begun to slow, and that’s slowly taking its toll on stocks.

Also, about 130 companies in the S&P 500 are due to report earnings this week, and forecasting statements will be closely watched.

Speaking of the S&P 500, the rustling I have been sensing since the beginning of the year has finally weighed enough on stock prices that a sell-off materialized. Looking at the below chart, Friday’s selloff snapped the index’s October uptrend, its 50-day simple moving average (yellow line) and the ascending narrowing trading range (black parallels) — all in one day.

From here, traders and investors need to measure the temperature of any bounce attempt, while recognizing that the next attraction level on the downside for the index is closer to the 100-day SMA (blue), currently around the 1760-1770 area.


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Yes, these support zones need a little wiggle room.

Volatility in the S&P 500 options as measured by the CBOE Volatility Index (VIX[1]) last week rallied a massive 45.8% on the week and right back toward the middle of its multiyear range.  The question now is whether this is a one-day wonder or something that will linger around for a little longer.

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While the worst-performing group of stocks on Friday was the transportation stocks, which unapologetically sliced below all of their near-term support levels, the worst sector in the S&P 500 was the industrial sector. The Industrial SPDR (XLI[2]) caused plenty of technical damage as it dropped significantly below its 50-day moving average and now has next better near-term support at the 100-day, which coincides with its November 2012 uptrend.

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This week is crammed full of earnings, an FOMC meeting and the State of the Union speech, all of which could lead to an immediate-term bounce. But at this point, it’s hard to see any of this being able to erase last Friday’s technical damage on the charts.

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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here[4]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. VIX:
  2. XLI:
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