Last week, reports made their way around Wall Street of Chinese officials reportedly saying the country doesn’t want a trade war but isn’t afraid of one. On Monday, investors are feeling the country’s actions in the stock market today, as China clearly isn’t afraid to up the stakes.
The S&P 500 and Dow Jones were down almost 3.5% at 3 p.m., while the Nasdaq was off 4%. The three indices ended the day lower by 2.75%, 2.9% and 3.5%.
To say it was a rough day in the stock market today is putting it lightly. It was the worst day of 2019 so far. Now investors have to do some careful treading, because the next few steps could be crucial.
Turnaround Tuesday
Seasoned traders will be looking for this: A weak close today (which we have, despite a small bounce in the final hour) and an ugly gap-down on Tuesday.
On a nasty gap down, they will look for the market to find its footing. Ideally that will happen in the first 5 to 15 minutes of trading, but can sometimes take 30 to 60 minutes depending on how strong the selling is. From there, they will look for some type of low to be put in. That’s so they have a level to measure against and can help them place a stop-loss in order to manage their risk – which is the key to trading.
From there, they will look to ride the bounce higher. Sometimes it’s a short-term run, other times it can last for a few days.
But the point is simple: Let’s see if the market can’t find its footing tomorrow and hopefully give investors a chance to “get to higher ground” in order to re-evaluate the quickly changing landscape in front of them.
Make no mistake: this has been a very violent four-day correction. We do not usually see a five-day loss exceed 6% on the S&P 500. Because for every 5% down in a major index, individual stocks can see major declines of 10% to 15%+ from their highs.
Last week, we said to watch to the 50-day moving average closely. If this level held, a bounce back to the 20-day was possible. Below and the 100-day was on the table near $288. If the latter failed, it put the 200-day on watch.
Painful as it may be, a flush down to the 200-day and the 38.2% at $276 may be for the best. It could exhaust the sellers and give buyers an opening get long. If we overshoot the 200-day on the downside, the June lows near $272 are on the table.
Strength on Down Days
On days like this and in environments such as the one we find ourselves in, I find it best to look for relative strength. That is, for equities that are outperforming when the rest of the market is getting slaughtered.
Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) are not an example of relatively strength, as both have been crushed over the past few days. But at least trade setups are nearing.
Instead, look at a name like Tyson Foods (NYSE:TSN). At one point, shares were up more than 8% and hitting new highs. Shares still managed to climb 5.1% on the day, despite in-line earnings results and missing on revenue expectations. Guidance was a bit better than expected, but the “why” doesn’t matter, the “what” does, and that’s that TSN was strong on the day.
Also look at Roku (NASDAQ:ROKU) shares held up well for most of Monday and went green with 30 minutes left in trading and finished higher by 2%. The company reports earnings on August 7th, but it’s clear buyers continue to like this one.
Consider how well gold stocks did today, with Kirkland Lake (NYSE:KL) and Barrick Gold (NYSE:GOLD) each climbing more than 4% as the SPDR Gold ETF (NYSEARCA:GLD) added 1.4%.
Lyft (NASDAQ:LYFT) reversed early on the day and closed higher by 1.5% on day, as it looks to try to bottom on its recent slide. Virtu Financial (NASDAQ:VIRT) is also looking to bottom, working on its fourth straight session of gains. If VIRT can reclaim its 200-day moving average, perhaps it can keep the rally alive.
On days like this, even closing near flat on the day is a victory. Names like Raytheon (NYSE:RTN), Fiat Chrysler (NYSE:FCAU), Pinterest (NASDAQ:PINS), Johnson & Johnson (NYSE:JNJ), A.O. Smith (NYSE:AOS) and Verizon (NYSE:VZ) all stood out.
Final Thoughts on the Stock Market Today
A turnaround day isn’t guaranteed. Nor is it a guarantee that the stocks that showed some strength on Monday will continue to on Tuesday.
They are just signs and guides to look for in the coming days. We don’t know if this is a 7% pullback near its end or a 17% pullback we’re not even halfway through yet. Try to stay calm, try not to panic and observe the market’s behavior.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long AMZN, GOOGL, ROKU, PINS and JNJ.
