Trading Places with Tom Bowley

Stocks Slammed, Futures Lower; Here's A Possible Support Level

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Market Recap for Friday, February 2, 2018

It was an ugly day on Wall Street.  In fact, it was the ugliest day on Wall Street since June 24, 2016, when the Dow Jones last fell more than 600 points.  Friday's drop was 665 points and the technical damage was obvious.  The volume was very heavy and the rising 20 day EMA was lost for only the second time since September.  That last time, in mid-November, it was a close slightly beneath the 20 day EMA and the very next day the Dow recovered and it's been trading above its 20 day EMA ever since.  Now that the 20 day EMA is lost, what's next?  Well, any time price momentum is accelerating on price highs, I look to the 20 period EMA for support.  On a weekly chart, the Dow Jones still has another 1000 points to go to test its rising 20 week EMA.  Check this out:


If nothing else, it's difficult to imagine we'll break out to new highs before a significant period of consolidation takes place. 

Energy (XLE, -4.18%) was easily the market's weakest sector on Friday as its negative divergence played out with a 50 day SMA test.  I had discussed this divergence last week, but highlighted the weekly chart.  Here's that negative divergence on the daily chart and the 50 day SMA test:

Now that we've seen a 50 day SMA test here, I'm keying in on three important levels on the XLE.  First, there's the trendline support near 71.00.  Then price support comes in at approximately 69.75.  Finally, the rising 20 week EMA (not shown above) is at 70.99.  A break below this 69.75-71.00 support area on the XLE would add another element of bearishness.

Technology (XLK, -2.96%) was also a disaster on Friday.  Apple (AAPL) and Alphabet (GOOGL) both reported their quarterly results after the bell on Thursday and traders were not initially impressed.  Then throw in the foul mood that unfolded during Friday's session and these stocks had no chance at redemption.

Amazon.com (AMZN) posted an excellent earnings report, however, and was spared the selling that the overall market experienced.  Performance in AMZN also enabled the consumer discretionary group to easily outperform many of its peers on a relative basis, with the XLY losing less than 1% on Friday.

Pre-Market Action

Futures are under pressure once again.  While earlier pre-market losses have been cut in half, Dow Jones futures are still lower by 150 points with 45 minutes left before the opening bell.  Volatility is apparent in pre-market trade and I'd expect to see a volatile session ahead as the bears look to continue their stronghold on short-term market action.

The Tokyo Nikkei ($NIKK) in an effort to match the Dow's Friday performance, shed nearly 600 points overnight with much weakness in Hong Kong as well with the Hang Seng Index ($HSI) falling more than 350 points.  In Europe this morning, the German DAX ($DAX) is currently at 12,672, which marks its lowest level since September 2017.

Current Outlook

Where do we look to support after a bull market rally that has been straight up?  That's a great question and, unfortunately, when rallies go straight up, they leave little in the way of support levels when the market begins to sell.  Then throw in the fear factor (rapidly rising VIX - see Sector/Industry Watch section below) for those who bought at the top and are still holding....and you have the recipe for a very quick and significant selloff.

January represented big gains for the S&P 500.  We ended December at 2673 and, less than four weeks later, closed at 2873.  That's 200 points in a very short time frame.  When a big selloff begins, I look to rising 20 day EMA support first, but that was torched on Friday.  We're now approaching the 50 day SMA, currently at 2715 - approximately 1.8% beneath Friday's close.  That would be next.  As far as price support goes, I'd look to the last resistance level that was cleared (TA 101 - broken price resistance becomes price support) and the last low that formed after a period of selling/consolidation.  Here's the visual:

The stock market has been rising with little selling since November 2016, but especially since August/September 2017.  We absolutely needed this selling.  From the chart above, the daily RSI has fallen from the upper-80s to 46.  We're no longer overbought, but with a VIX above 17, we need to be careful in the very near-term.  Cash is a position and watching this unfold from the sidelines for now isn't a bad strategy for short-term traders.  For those holding for the long-term, this type of selling was inevitable and is a part of the buy and hold strategy.

Sector/Industry Watch

The Volatility Index ($VIX) should now be watched closely.  It closed above a key 16-17 range for the first time since the 2016 election.  Piercing the level isn't a longer-term bearish signal, but staying there is.  So bulls should look for a significant drop in the VIX on the next market rally.  If that occurs, I believe the odds are much better that this selling is temporary and, after consolidation, we move higher again.  However, if the VIX continues marching higher and stubbornly remains at or above that 16-17 level on market rallies, there could be something more serious brewing.  Here's a long-term chart of the VIX and a quick reminder of what to keep an eye on:

Let me be clear.  I believe the bull market rages on.  I've seen no evidence of a long-term, bear market type decline on the horizon.  But this rally has been uninterrupted.....until last week.  A period of selling/consolidation/basing would be very good news for the market.  As this period unfolds, we'll be able to glean more from it.  Volatility will likely be high for the very near-term and that means elevated risk no matter  whether you're long or short.  I'm allergic to risk so I'll be sitting it out for now, waiting for more definitive signs that a near-term bottom is in.

Monday Setups

Given the recent overbought conditions and Friday's significant selloff, I'm going to hold off on any Monday Setups this week.  Entering new positions during violent selloffs is not typically prudent for short-term traders.  Should we see a promising reversal one day this week, I'll revisit the setups mid-week.

Historical Tendencies

For this section today, I want to point you to my ChartWatchers article over the weekend, "The NASDAQ 100 And Its Best Seasonal Candidates In February".  I pointed out two stocks that have performed extremely well from February through April.  Perhaps the current selling is setting up opportunities in these two NASDAQ giants.

Key Earnings Reports

(actual vs. estimate):

BMY:  .68 vs .67

HES:  (1.01) vs (.93)

SYY:  .66 vs .65

(reports after close, estimate provided):

BAP:  3.41

NTR:  .42

SWKS:  1.91

Key Economic Reports

January PMI services index to be released at 9:45am EST:  53.3 (estimate)

January ISM non-manufacturing index to be released at 10:00am EST:  56.2 (estimate)

Happy trading!

Tom

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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