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The Stock Market’s Scary Day and Almost Magical Close

The Stock Market’s Scary Day and Almost Magical Close

Courtesy of John Nyaradi

Midweek commentary from Wall Street Sector Selector

No doubt today was scary as the markets opened down sharply and traded mostly lower all day in one of the most volatile of recent sessions.  The reason given for the sell off was an economic slowdown in China and worse than expected consumer sentiment.

So it was a scary drop but the most interesting part of the day came at the close when the S&P 500 almost magically closed above the all important 1040 level.  For technical traders, 1040 is something of a magical number because it represents significant support and a level that is now being tested for the fourth time this year.

Chart courtesy of StockCharts.com

In the chart we can see how 1040 on the S&P represents the February, flash crash and June lows and so this is the fourth retest of that all important level.  Everyone “knows” that if the index breaks decisively through this level that lower prices are likely ahead and so one can only marvel at how, after trading as low as 1035 in the late going, the index made a last minute move back above this all important psychological level. 

Also on the top display, you’ll notice that RSI is approaching “30” which is widely considered to be “oversold” and the technical sentiment measurements I follow point to extreme pessimism (after today’s action, who isn’t pessimistic?) which as a contrarian indicator could indicate higher prices ahead for the short term. 

So we stand at a most interesting crossroads.  From here, if the market recovers and holds the 1040 lows, it’s quite likely we could see a rebound rally as we’ve seen three times so far at this level this year.  A break below could lead to further deterioration and significantly lower prices ahead. 

I don’t have a crystal ball, just as no one does, and I can’t foretell the future, but we can make an estimation of probabilities; if 1040 on the S&P holds, the most likely probability based on technical indicators is for higher prices over the short term.     

There’s the bearish side of the market and the bullish side of the market, but as the old saying goes, “the only side that matters is the right side.” 

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John’s disclosure: EWW,TUR, FXI, IYR, SPY Call Option 


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