Last Tuesday, August 13th I discussed (HERE) that after such a steep run in stocks year to date a correction of 5% – 10% would be nothing unusual nor anything that longer-term investors would need to concern themselves too much with. Two day later, stocks snapped an important near-term support line. Fast forward six trading days to today, Thursday August 22nd and the S&P 500 is now 3.00% lower on a daily closing basis, marking the entire move off the August 2nd highs at just a tad over 4.00%.
From a technical point of view the S&P 500 is now however nearing a first better support area, which is marked by the 50% retracement of the entire June/July rally, as well as the 100 day simple moving average (blue line on the below chart). Given the broader topping indications in equities at least for the next two months, this is no time to play ‘catch the knife’ for anyone but the quicker traders. In the grander scheme of things whether the S&P 500 ‘correction’ ultimately halts at 1’600 or 1’560 hardly matters for those in the market for the longer term because, hey, the index was trading below the 1’600 mark as recently as late June.
Through a trading lens however playing potential downside toward 1’600 or 1’560 is a rather juicy trade that not many traders will leave untouched. The quicker traders may find better levels to enter short-side trades in coming days or weeks, once an oversold bounce takes place. Note also on the above chart that the daily gyrations in the index have widened as the average true range is on the rise.
The Dow Jones Industrial Average for its part has thus far, from its Aug. 2nd intra-day high to yesterday’s intra-day low corrected 777.59 points or 4.90%. This index too is oversold in the near-term and could bounce soon. Ultimately better support is the up-sloping neckline (black) that currently sits near 14’680. Likewise, an eventual break below this level would have further bearish implications.