The major indexes hemorrhaged points last week with the Dow losing -1,095. After being up 7.68% for the year, the Dow lost -3.2% last week or roughly half the gains from January. The Nasdaq 100 had been up +9.8% but gave back -3.74%. How much is enough to equalize overbought pressures and allow the market to rally again?

I would say that was the right amount. However, we could see some forced margin selling at the open on Monday and some selling from investors who were not paying attention on Friday. They probably picked up a paper or turned on the TV Friday night and ended up with a nervous weekend hoping they could get out on Monday before it falls any further.

The rest of us have been waiting for a decent decline to buy. If I had surveyed people last week and asked how much the market needed to drop before everyone was comfortable getting back in, I would have expected the minimum level at 3% with some hoping for a 4-5% dip.

If our portfolio was empty I would be hoping for a 10% dip. However, anything further than what we saw last week could be painful for our existing positions. We only lost two positions and I consider us lucky. I did have the stocks wide after the January rally in hopes we would not be stopped out on a material decline.

The S&P futures opened down about -19 on Sunday evening. By 11:PM ET they had improved to -7. If Asia and Europe do not meltdown as a result of our Friday free fall, then any opening dip on Monday could be minimal. That would set the stage for a decent rebound. However, we need to be cautious because the first rebound after a major decline sometimes turns into another sell cycle.

As I have said before, there is nothing weighing on the market. The economy is strong, earnings are strong and sentiment is strong. The market should continue higher long term but it may have to take a couple of side trips in February and again in May.

The economic calendar for next week is bland except for the government funding deadline on Thursday. The most recent news is that they are going to try and kick the can farther down the road until March 22nd. They are not sure they have enough votes to pass that yet but the scuttlebutt is that nobody wants another shutdown.

The earnings calendar is busy but the majority of the big names have already reported. There is only one Dow component, Disney, and 93 S&P companies. Tesla and Nvidia will be the most watched.

The S&P declined -111 points for the week and -60 on Friday. The clear technical target is the 50-day average at 2,715 but there is light support at 2,735. The S&P has entered into an area with converging support so it would take some concentrated selling to push below that 2,715 level.

The Dow has minor support at 25,250 followed by the 50-day at 25,016. The Dow is not very reactive to moving averages because of its narrow 30 stock composition so the real support is 24,700. I really hope we do not go there in February but we will see that level again eventually.

The Nasdaq has a good history of bouncing from the 30-day average over the last six months. However, the average itself is elevated and that means it should have less impact. That would be a good spot for a bounce at 7,203 but more than likely it will bounce off those multiple converging lines of support just under that level.

The Russell broke critical support at 1,550 by 3 points but that is close enough to still be in play. The major uptrend support at 1,560 was broken as well as horizontal support at 1,570. There is only light support left at 1,535 and then the Russell is in freefall territory until 1,508.

I wrote in the Option Investor commentary that I was expecting an early morning dip on Monday that would hopefully be bought and produce a rebound in the afternoon. My outlook has not changed. I am encouraged to see the S&P futures recover to -6 but there is still a lot of darkness before morning. I still believe we could see further weakness closer to option expiration but last week's heavy selling may have negated that to some extent. I do not see a continued euphoric market. I think now that the Q4 earnings cycle is winding down, the excitement will decline as well.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email