Thanks to a few pieces of disappointing economic data released last week, the S&P dropped over 3% on Tuesday and Wednesday alone. The Dow Jones lost nearly 1,000 points over the same period, while the S&P 500 Volatility Index (VIX) jumped above the 21 level.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
As you can see in the chart above, the S&P tried to hold above its 50-day moving average (red line) for a few sessions. However, Tuesday’s ISM Manufacturing Purchasing Managers’ Index (PMI), which showed the lowest reading in 10 years, pushed the index below that key support level.
On Wednesday, ADP reported that the private payrolls number came in below expectations in September, while August’s reading was also revised lower. That prompted traders to hit their sell buttons again for another big down day.
Then, on Thursday, the ISM non-manufacturing PMI also showed a lower-than-expected reading. It was still in expansion territory, meaning that the non-manufacturing sector of the economy is still growing, but it was down pretty significantly from August.
One would think that the market would be down again, but it actually rebounded sharply going into the weekend. I think the reason for that is purely technical.
Going back to the chart above, I added its relative strength index (RSI) indicator to the bottom panel of the chart, which shows it got down into oversold territory.
Traders often use indicators such as the RSI to determine whether a stock or index is in “overbought” or “oversold” territory. Typically, an RSI reading above 70 tells traders that an asset is overbought, or overvalued, while a reading below 30 tells traders that an asset is oversold, or undervalued.
Following Wednesday’s decline, the RSI reading for the S&P was sitting around the 35 level. That’s not as low as the 28-30 readings we saw before the June and September rebounds, but it was close. Typically, when a stock or index gets down into that range, you will see a bounce.
The question now is where the markets go from here. October is one of the more volatile months of the year. Some significant market declines have occurred in October in the past – just think back to 2007, 1987 or even 1929 – but there is a silver lining.
That silver lining is that October is also typically the month when stocks form a bottom. Sometimes, they go on to rally through the end of the year, although sometimes they do not.
It’s hard to say what’s going to happen next for the S&P 500, but I have been keeping an eye on one individual stock that I think will continue to trade well despite the economic data.
Daily Chart of DocuSign, Inc. (DOCU) — Chart Source: TradingView
Based in San Francisco, DocuSign, Inc. (DOCU) provides cloud-based e-signature software that allows businesses to prepare, execute and act on agreements all in the cloud.
Taking a look at the chart above, you can see that the stock fell sharply going into August before forming a nice base and then gapping higher in September.
Shares took a pause as they hit resistance at the $65 level last month, but they are now consolidating nicely in what looks to be a bullish “flag” pattern.
A break out of that pattern could lead the stock up towards its all-time highs near $68, which is just above where I’ve set my strike price for the long call option I’m recommending:
Buy to open the DocuSign, Inc. (DOCU) Nov. 15th $67.50 Calls (DOCU191115C00067500) at $1.40 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.