Assessing The Recent Stock Market Damage

Stocks endured another round of eventful trading this week. After reaching new all-time highs to start off the new quarter, stocks entered into a suddenly sharp descent last Friday, and have been moving lower in fits and starts over the several days since. And by the close of trading this Friday, stocks, as measured by the S&P 500 Index, were once again in negative territory for the year. This latest bout of pressure raises the natural questions. Are stocks finally entering a sustained corrective phase? Or is this just another pullback in the ongoing bull market rise?

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Stocks In The Heat Of Battle

Stocks have managed an impressive bounce from their early Wednesday lows at 1737 on the S&P 500.  But after a strong 60 point surge to 1797 to close out the week, it is reasonable to wonder whether stocks have further to run higher in the coming days or if a fresh move lower lies ahead.  How stocks behave in the early part of this week will go a long way in answering this question, as stocks are currently trading in a thicket marked both by various support and resistance levels.

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Friday was a particularly notable trading day, as stocks smashed back through potential resistance at both the 100-day moving average and the 1775 level on the S&P 500.  As a result, the 1775 range represents the first line of defense for any reversal lower in stocks in the coming days, with the next stop at the upward sloping 150-day moving average currently at 1741 and rising.

Stocks also now have some meaningful challenges in continuing their move to the upside.  The first line of resistance is at the downward sloping 20-day moving average currently at 1802 and falling.  The next is at the 50-day moving average that just recently turned lower and is currently at 1809.  And the third is at 1813 on the S&P 500, which represented the previous all-time high for the index first reached back in late November and has served as both resistance and support on several different occasions since.

In short, stocks currently find themselves in a fairly tight range where a number of support and resistance levels have converged.  How stocks respond to these various levels over the next few trading days will go a long way in determining how the market is likely to move in the coming weeks.

Stocks: Responding To Support

U.S. stocks made an aggressive charge at breaking below the 150-day moving average on Wednesday morning.  But this ambush was quickly turned back the moment stocks arrived at this support level and the bears find themselves in retreat heading into the afternoon trade.  Stocks received an added lift to the upside once the clock struck half past ten in the morning with the liquidity from $3-4 billion in Fed Treasury and TIPS purchases finding its way into the market.

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In addition to the 150-day moving average, stocks as measured by the S&P 500 Index have additional support at an upward sloping trend line that has provided support on five previous occasions over the past year.

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Whether stocks are able to bounce sustainably higher from these levels remains to be seen in the coming days.  But the further that stocks fall, the greater the technical damage and the more previous support levels suddenly become resistance.  And in a market that remains woefully short of fundamental support, investors should remain cautious and avoid becoming too comfortable on any bounce higher from here, as such rallies in the coming days, weeks and months are likely to be accompanied by increased volatility and may represent the market entering the final stages of completing a bull market top.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Stocks: Multi Layered Support At Current Levels

Stocks as measured by the S&P 500 finally made their move and broke decisively below support at the 200-day moving average.  Overall, stocks have shown little fight in trying to hold key support levels in recent weeks.  They only bounced once off of the 50-day moving average before breaking lower, and they battled for only three days at the 200-day before giving up the fight.

Now that stocks have broken several major resistance levels, it is worthwhile to consider where support lies next.  The good news for stock investors is that the market is still holding just above a variety of well established support levels.  The bad news is if stocks break below current support, the trip lower might be swift through a sizable air pocket.

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Stocks currently have technical support on five key readings.

First is a long-term trend line around the 1350 level on the S&P 500.  This level was previous resistance for the S&P 500 during its advance in 2011 and has served as support on a few occasions since breaking above this level in 2012.

Converging at this same 1350 level is an upward sloping trend line dating back to the August 2011.  Since the sharp correction last summer, the stock market has bounced off of this trend line on four previous instances over the last year.  At present, stocks are trading just above this trend line.

Another longer-term trend line is also currently converging at the 1350 level.  This is a trend line dating back to the summer of 2010.  Stocks have responded to this support on four separate occasions over the last two plus years.  And when stocks periodically broke below this trend line in the second half of 2010, they still demonstrated responsiveness to this support in never breaking decisively below it for any sustained period.

Beyond the trend lines, another important indicator supporting stocks is the Relative Strength Index (RSI).  It touched a reading below 30 this week, and the last nine instances that the RSI approached or dropped below 30, it marked the bottom of a stock correction at the time.

Lastly, momentum indicators as measured by the MACD have fallen to levels last seen on only a handful of instances in the last three years.  Comparable levels of negative momentum were seen at past market bottoms over the last three years, with the only exception being the sharp pullback during August 2011.

As a result, the stock market enjoys well established support across a variety of metrics at current levels near 1350 on the S&P 500.  Holding this support will be crucial in the days ahead, for the next stop to the downside could easily be 1300 or below on the S&P 500.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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