So, who saw that coming? Actually, the complacency in the VIX as described in a recent post was a warning sign. The halting pushes to new all-time highs (ATH) followed by a couple of down days were also warning signs. But, as one famous market saying goes, “stairsteps up, elevator down.” We got in the elevator today and it went down hard.
The blue chip market (DOW and S&P500) lost about 1.75% today. The small caps (Russell 2000) and NASDAQ lost about a percent more for a 2.75% loss on the day. In the process, the S&P500 fell below it’s 50-day simple moving average. It also caused the moving average to have a downward slope for the first time since late 2016. Remember one of my trading mentor’s truths about the market: “Nothing bad happens when price is above a rising 50-day moving average.” Well, price isn’t above a rising 50-day moving average anymore. Again, that doesn’t mean sell everything and run for the hills. What it means is that some clouds are starting to dot the landscape of a bright, blue, sunny sky. It means if you bought the breakout on April 24th from the French preliminary elections leaving a large gap, your purchase is likely underwater. Hopefully, you used proper risk management and placed a stop if you are trading in that manner.
Here is the good news as I see it…I see a few areas of obvious support immediately below that could be smart areas to take trading opportunities like the breakout trade discussed in late April. Yes, the 50-day moving average is above price, no support there unless we close back above it soon (which is likely for a reason that involves options expiration on Friday). The bottom of the gap formed from the close on April 21st is near SPY 234.50. There is Fibonacci support between 235 and 236. But after 234, next support is 232, 230, and then 225. Buying near 225 or below could be a good LONG TERM place to consider adding to your equity exposure if you have cash to deploy.
Finally, if you are using a covered call strategy to earn income on a larger holding of SPY or other stocks, a day like today is a pretty good day to consider buying them back if they have produced 75% to 90% of their expected income returns, especially if they expire any time after THIS Friday. If you want to discuss this idea further, ask a question in the comment section and we’ll talk it over! Hope this post helps you sort through the rubble of a losing day on Wall Street.