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Outlook and Key Levels to Watch – Dr. J's Market Thoughts Press "Enter" to skip to content

Outlook and Key Levels to Watch

That bounce didn’t last long, did it?  Hope you took profits when they were there for the taking.  If the past few years have been an “investor’s market”, meaning price has steadily pushed higher and higher with low volatility, I’m concerned we are heading back into a “Trader’s market” where Buy and Hold will not work as well as it had.  In a Trader’s Market, taking some or all profits when a bigger move occurs is the prudent course of action.

Dr. J’s Thoughts

Here are the things I see that are BULLISH for this market:

  • Price is still inside the white channel formed since February 2016.  By the end of the week, this level is 2740 S&P500. (white lines)
  • 200 day moving average is still (barely) in a rising posture, but it is flatting out and trying to roll over to a declining posture. (yellow line)
  • Price is 2% above the recent lows from early October.
  • In past posts, I’ve talked about Fibonacci numbers and support zones traders use.  The TEAL dotted lines between 2690 and 2740 indicate a potential BUY ZONE based upon price from the 2018 lows from February to the September highs.
  • Price is still above the Market Alert Line.

Here are the things I see that are BEARISH for this market:

  • Price closed below a falling 50 day moving average. (teal line)
  • Price closed below a level 200 day moving average. (yellow line)
  • Up day volume is less than down day volume on the SPY.
  • The small caps (usually a leading indicator) are considerably weaker than the S&P500 or DOW.
  • The DOW Transports (another leading indicator) are weaker than the S&P500 or DOW as well.
  • On a relative basis, the leading markets are about 5% lower than the broad, major markets.

As we enter the week of October 22, here are levels I want to see hold up to keep any kind of bullish stance on the US stock market:

  • No daily closes on the SPY below $274.30—this is an important one as it would be a second recent close below the white 2016 channel.
  • No daily close on the SPY below $270.36—this level opens the possibility of a drop into the 2018 lows at a minimum and possibly lower

If you are NOT a trader and just a long term, retirement oriented investor…continue your normal dollar cost averaging into low cost investment vehicles, maintain your diversification, and be sure to discuss your individual situation with your financial advisor should you start losing sleep at night.  The US stock market could quite easily lose another 10% rather quickly and I would not be surprised at all by that event.

I recently completed an article and as a sneak preview to blog readers, I’ll include the 10-year interest rate chart that will be one exhibit in it.  If this chart doesn’t scare you, I’m not sure what will.  Why does it concern me?  Typically, investors run to bonds as a “safe haven’ when the equity markets are having issues.  However, if the fundamental direction of the bond market has changed from interest rates heading lower over the last 35 years to potentially heading higher, then the bond market may not be as great a place to hide from stock market volatility.  That concern does NOT mean that rates will never go down in the short or intermediate term when the stock market sells off, they will most definitely vary and oscillate up and down, but just as they relentlessly fell over many, many years, I am concerned they will relentlessly rise over many, many years coming up.  Here’s the chart: