Don’t Bet on Support Holding

Advertisement

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

It ended up being a September to remember. The S&P 500 fell 7.2% for the month and is down 14% since June, and the Nasdaq lost 6.4% for the month. For both indices the quarter was the worst since the quarter ended December 2008. 

October tends to be a weak month historically, but given the political wildcards an easier and more sensible “prediction” to make at this stage is one of volatility, which is sure to remain elevated for some time.  

The S&P 500 left an ugly weekly candle last week. The long tail shows the inability of bulls to keep the index at higher levels intraweek, and left the index closing right at the slightly upward sloping support line (white line). The stochastic oscillator also indicates further downside is possible. 

Given the confluence of support at the 1,100 area from the 200-week simple moving average and 38.2% Fibonacci retracement level off the 2009 lows, it is likely (in fact almost certain) that many stops are placed in that vicinity. As such, it is unlikely that 1,100 can hold as support, because if and when the stops get triggered, the selling pressure will quickly take the index lower and through the 1,100 area. 

SPX Chart

The Russell 2000-small cap index is again hugging the 2011 lows and looks as though it will slip lower as well. 

RUT Chart

Implied volatility on the S&P 500 as measured by the VIX shows a bull flag pattern on its chart below. The pattern suggests higher volatility is likely, and a solid daily breakout above 45 could send the index well into the high 70s or low 80s. As equity volatility most often displays an inverse correlation with stocks, this would mean another significant and potentially swift leg lower for stocks.

VIX Chart

The energy sector as measured by the Energy Select Sector SPDR (NYSE:XLE) recorded a new closing low for 2011 on Friday after re-testing overhead resistance earlier in the week. Given the importance of the energy sector (along with the financials), this is certainly worth noting.

XLE Chart

The overall trend remains lower, and with the crucial 1,100 level on the S&P 500 approaching, a quick swoosh lower to hit the stops cannot be ruled out. I remain playing this tape conservatively with select short positions but clearly defined stops as politicians remain holders of the wild card and any rhetoric has the potential to be bought quickly, leading to nasty short squeezes.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/daily-stock-market-news-dont-bet-on-support-holding/.

©2024 InvestorPlace Media, LLC