You could not script conditions any better for market uncertainty.
The major indexes traded sideways in a very narrow range for nearly two months. The S&P went 40 days without a 1% move. Over 5 weeks the S&P only had back to back gains three times. This major consolidation pattern at market highs collapsed in only one day with a 2-3% bearish move to close at the low for the day on a Friday. Monday could see another 2% move in either direction or no move at all.
The explosive breakout from the consolidation range was expected. We knew it could not continue forever. The indexes with the biggest gains the prior week had the biggest losses.
The big question now is where do we go from here?
The problem with reading charts this weekend is that the big one-day drop has skewed all the indicators into oversold conditions in only one day.
The Dow stopped right on the 100-day average at 18,085 but because of its narrow composition the Dow is not normally reactive to moving averages. The MACD has been in decline since late July despite the new high in August. After Friday's drop the MACD is turning bearish.
The S&P decline is so out of character to the prior two months that we have to look for support at a lower level around 2,100. A breakdown below 2,100 targets 2,000 with a potential pause point at 2,020. The S&P has not been reactive to moving averages in the last year.
The Nasdaq set a new high on Wednesday only to blow through support at 5,200 on Friday. There is no near term support until 4,975. One more big decline like we saw on Friday would get us there in a hurry. The 5,000 level is a big round number that has been support/resistance in the past and it could be a price magnet on this decline.
The Russell 2000 had a clearly defined trend with stable rising resistance that finally proved too tough to crack. Fortunately the Russell also has clearly defined support at 1,200 that could function as a brake for the broad market. The Russell 2000 and the Dow Transports tend to act as sentiment indicators for the broader market. If the Russell reached 1,200 and fails to break lower, it could put the brakes on the broader market decline.
The S&P-600 Small Cap Index also has a clearly defined uptrend channel. The drop on Friday put the index back on uptrend support and the center of the recent congestion was 740, which is where the index closed on Friday. I doubt that will contain the decline. I have more confidence in the horizontal support at 729. A failure at 729 targets 665.
The S&P-400 Midcap Index was also making new highs. However, it has fallen harder than the S&P-600 and is already below the same relative congestion levels. The index closed at 1,528 with support at 1,525. However, I am not confident this support will hold and a continued decline could be ugly with a potential decline to 1,410.
The Russell 3000 last made a new high on August 15th and fell completely out of the consolidation range on Friday. If support at 1,250 fails, it targets 1,200. This is the broadest representation of the market and a break below 1,250 could cause sentiment issues with the rest of the indexes.
The problem with projecting downside targets is the calendar. Portfolio managers are going to be very interested in finding a bottom as quickly as possible so they can go all in and hope to maximize returns over the next six weeks. It is in their best interest to crash the markets as quickly as possible by selling all their unwanted positions and then transfer that cash to new positions.
The upside resistance has not changed but it has moved farther away. If we get another 2-3% decline it could take weeks to recover the highs. Since the Fed meeting is September 21st and the election only six weeks later, there will be continued uncertainty for a long time.
We may experience bouts of volatility for the rest of September. This is the third week of the six most volatile weeks of the year. Last week was an example of that potential volatility with new highs and then new 8-week lows two days later.
Complicating the future for the Nasdaq, the semiconductor sector is in decline. This is the leading indicator for Nasdaq direction. After peaking the prior week the Semiconductor Index is heading lower and the Nasdaq will eventually follow. The Nasdaq ALWAYS follows the $SOX. Fortunately, the SOX has support at 750 and it is possible this is just a temporary trend change. The SOX has a tendency to correct every month of two and it has been two months. The Apple suppliers are in an accelerated decline on expectations for lower iPhone sales.
Also complicating the Nasdaq's future is the weakness in the Biotech sector. The $BTK has been chopping around with no direction for the last six weeks because of the drug pricing headlines and blowups in several biotech stocks. Without the BTK to provide additional support missing from the semiconductors the Nasdaq is going to be in trouble. The biotech sector may not recover until after the election and then it depends on which candidate wins.
I am bearish on the market for Monday. I believe margin calls and Fed speakers will control our fate. Once the last speaker walks away from the podium about 1:30 it will be time for the afternoon margin call sellins. If Brainard remain dovish the market could rally after her speech, assuming Lockhart and Kashkari did not turn significantly more hawkish.
With fund managers wanting to end the crash quickly, I would expect bullish sentiment to return before the end of the week.
Enter passively and exit aggressively!
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