Its been an interesting week to say the least with quite a bit of selling going on in the Nasdaq-heavy tech and so-called "stay-at-home" stocks. Money is coming out of stocks that have done well during Covid-19 and going into "recovery stocks," stocks that have lagged growth stocks during the recovery of the last 11 months, and into bonds as well. However, there are some warning signs on the charts for the all of the indexes to which we should pay attention.
As I noted last week, the S&P 500 index (SPX) seemed to be stuck around the 3915 level all week. We finally were able to push above that area late last week hitting resistance at the depth of consolidation targets from our October and November lows.
However, that is when the selling started and we saw the SPX break back below this level pretty hard but found support just above the 50-day moving average on Tuesday. Yesterday, we had a slight retest but quickly found support at the 21-day moving average and late-January highs. This is a really good sign that we are still determined to make higher lows and the chart doesn't appear to be forming the right shoulder of a head-and-shoulders pattern.
On the Nasdaq-100 (NDX) chart, the story is a bit more merky. The NDX took the brunt of the selling this week but each day, so far, has been met with buyers coming in to buy the dip. As I write this, the Nasdaq 100 futures are down over 100 points so it looks like we will retest our lows of earlier this week again today.
Key levels are the 50% Fibonacci extension level for resistance and yesterday's low of around 12,980. Penetrating the resitance will break the head-and-shoulders to the upside and allow us to go ahead and test the previous high of 13,880. However, a break below yesterday's low of 12,980 and then the 38.2% Fibonacci level of 12,850 could spell reversal. This could have huge spillover affects into the SPX since the NDX-100 stocks account for such a huge percentage of the S&P 500. Weakness in the NDX could cause the SPX to retest its support levels of 3,817 and 3,760. As long as those levels hold, it wouldn't signal reversal for the blue chip index. The key level to watch there would be the 3,725 level.
There is also reason to be concerned about small caps. The Russell 2000 (RUT) index is now just over 2 standard deviations about its 200-day moving average. It didn't even make it into the snipet capture of the chart below (its currently at 1,688.75).
Usually, a 2 standard deviation gap above the 200-day moving average is a clear indication that prices are stretched. The chart looks healthy though, other than that. If we see weakness in the other indexes, we could definitely see some spillover selling in the small cap index causing some reversion to the mean. Key levels to watch for the RUT are the 38.2% level just below at 2212.50 and then the 2,067 level. If we test the 2,067 level, that could ring some alarm bells.
Keep a close eye on the market as we seem to be hitting some key technical levels. Hopefully, we will see these levels hold. Personally, I wouldn't be surprised if we see some sideways action here like we saw from early-September to late-November. We have significant economic data coming out today and tomorrow. As always, the jobless numbers will be closely watched this morning. In addition, we have durable goods orders and a second look at GDP at 8:30 AM. Tomorrow, we have personal income and spending, PCE prices, and consumer sentiment data coming out. It will be an exciting end to an exciting week and month!