The S&P 500 saw volatility return on Thursday with a 2.11% loss and that volatility continued into Friday with a 3.19% drop. After posting a second consecutive gain on Monday, the index saw the next four sessions finish with progressively larger losses on its way to dropping 5.77% for the week. The index has seen losses in six of the past nine weeks. Since breaking lower from July 20 highs it has seen 16 lower finishes in the past 24 sessions.
China’s markets again appeared to react to the past week’s increase in volatility indicators as the Shanghai Composite slid 6.15% lower on Tuesday. It shed over three percent early Wednesday before rebounding to finish over one percent higher. That gain was short lived as it dropped sharply again Thursday and finished with a 3.42% loss. The retreat continued Friday with that fall losing 4.27% more. The composite finished the week with a 12.17% loss.
The Shanghai Composite saw Friday drop to the support established during the crash. This support was created with Chinese government interventions meant to stabilize market prices. The current retreat might hold at this support, at least temporarily, but the chart is currently showing a downward biased wedge on this support. If this support breaks and the index continues lower, a resistance is likely to build around this level. That resistance could become a stopping point for rebounds for many years to come.
The volatility indicators that China’s markets have appeared to be reacting to have remained in a high state for a very long time, yet prior to Thursday the US markets had shown an eerie absence of daily volatility during this stretch. The S&P 500 had seen only one volatile session prior to Thursday; uncommonly low volatility compared to that seen during past long stretches of these high indications. These indicators remain near extreme levels, suggesting a high potential that volatile daily market conditions could continue.
The current retreat has several similarities to an earlier decline. As is the case now, a deeper drop also began after a rebound that failed to recover a significant drop in 2011. The 2011 failed rebound peaked on July 7 after a significant drop from the April 29, 2011 high. The 2015 failed rebound peaked on July 20 after a significant drop from the May 21 high.
Thursday and Friday’s volatile retreats on the S&P 500 are the first back to back sessions with two percent or greater losses since Oct 31 and Nov 1, 2011. Those two were the last of three pairs of volatile retreats seen during the 2011 decline. The past week’s retreat was also the largest seen since a 6.54% slide during the week finishing Sept 23, 2011. The S&P 500 finished Friday the furthest below its 200 EMA since Oct 5, 2011. That reading was seen as the index began rebounding off the lows, but Friday’s low was similar to that seen on Aug 8, 2011 the deepest below the 200 EMA to that point as the index descended into lows.
That period in 2011 was the last to reach the extreme levels currently seen on volatility indicators, although it had already seen several volatile moves prior to reaching extreme levels. Volatile conditions erupted on July 27, 2011 and the index saw 31 daily prices moves in excess of two percent higher or lower before volatility quieted again after the last was seen on Dec 20.
The failed rebound to recapture the significant drop in 2011 fell very near to crash proportions after breaking lower again. Although not all failed rebounds from significant drops have led to corrections or crashes, a rebound that failed to recapture the highs after a significant drop before falling more deeply is a trait seen in most corrections and market crashes. Current conditions make a larger drop seem possible. The sharp turn lower after a failure to recover losses from an earlier significant drop is reason for additional caution.
The similarities between these two periods do not mean the market will follow the same path, although there are much better reasons for this retreat now than there were then. In 2011 earnings were fantastic, P/E ratios were very low, economic expansion was very good and although Greece was in the spotlight, Europe could have still easily fixed the problem then. Today earnings growth is nearly nonexistent while earnings headwinds appear to be rising, P/E ratios are near historical highs, many economies appear headed into recession and after Greece again took center stage due to the second failure in economic policies; Europe continued to increase on the already proven failed courses of actions, making an eventual total debt default by Greece nearly inevitable. Although the other PIIGs have not recently reached the headlines, all of these economies suffered while the rest of the world saw recoveries. After six years of economic recovery that Europe could have used to make real progress in fixing their problems, it appears they only managed to make them much, much worse.
The VIX shot over 24% higher on Thursday and over 46% higher on Friday. Although this type of increase on the VIX is seldom seem prior to market moves beginning, the large increase seen on this indicator could show that many investors believe that the current downturn could continue. This high reading appears to be showing investor sentiment is bearish and therefore considered a bearish indication.
Several of the major indexes shattered support levels that have held in several of the previous retreats in Thursday’s drop. All five of the indexes discussed below finished the week at a yearly loss at Friday’s close.
The Russell 2000 was the only index to hold a support level from earlier this year during the past week’s retreat, as it had already broken below several potential support levels. It fell through two of three session lows in January and February that it had found previous support at, but has so far held above the lowest of the three. Friday’s retreat saw a low that fell within a dollar of the Jan 16 low.
The Russell’s break of support there would leave the NASDAQ as the only index that hasn’t broken below all possible support levels established this year. The NASDAQ had found similar support during the same time periods as those that the Russell is currently at. The NASDAQ fell to the lowest level since Feb 4 in Friday’s retreat, breaking below the highs seen during that support. During the past week’s retreat the NASDAQ broke below the May 6 low that had survived a previous two session test. It finished Thursday’s session below its 200 EMA for the first time since Oct 16. Friday’s retreat took the index much deeper below this average.
The New York Stock Exchange broke deeply below a developing wedge on support that had held in four previous drops, including the retreat seen on Wednesday. This support level developed only slightly below the lows seen in March before Thursday’s retreat broke deeply below that support. Friday’s continued fall took the index price to levels not seen since Oct 16.
The Dow Jones Industrial Average broke support that had previously held near its Dec 16 low on Thursday. The continued fall Friday took the Dow to a price not seen on the index since Oct 21.
The S&P 500 broke below support near 2040 that had held since a rebound began from a Feb 9 low that rebounded to break resistance and move to new highs. It also fell to a Friday finish slightly below support seen in the Dec 16 low. The S&P saw its fifth break below the 200 EMA since July 7 as its last three cycle lows saw sessions puncture it. Friday finished the furthest below the 200 EMA it has been since Oct 5, 2011.
Bearish crosses also continued to be seen on the indexes. The NASDAQ saw its 13 EMA slip below the 50 EMA. The Dow Jones and NYSE saw the 50 EMA dip below the 200 EMA. Although it has not yet crossed, the Russell saw the gap the 50 EMA has above the 200 EMA narrow considerably in the past week.
The breaks of long standing support levels are a potentially bearish indication. Bearish divergences on the charts continue to be evident. Even though the indexes saw substantial retreats, downward pressures seem far from relieved. Volatile daily market moves often produce volatile daily countermoves. It therefore seems possible a volatile session rebound could be seen. Although rebounds from lows in earlier retreats resulted in furious moves higher, volatile session rebounds are not always bullish. It seems quite possible additional downside could still be seen and any additional daily volatility could be a sign a deeper drop is in progress.
As with last week, second quarter earnings were found for 18 of the S&P 500 constituents, although not all those found reported earnings during the past week. These constituents reported total earnings that were $0.10 higher than the same quarter a year ago. This represented a 0.005% increase over the index’s total trailing twelve month earnings from the week before and an average increase of 0.21% in the TTM earnings of those 18 constituents. One constituent that had reported earlier also saw their previous report reduced by $0.01.
The large retreat in stock prices greatly increased the numbers of S&P 400 constituents that finished the week below their 200 DMA. There were 266 constituents that finished Friday beneath it, a large increase from the 206 in the previous week. The index finished Friday with 304 constituents either below or less than one dollar above their 200 DMA, also a large increase from the 244 in the previous week. There were 295 of the constituents that finished Friday greater than 10% below 52 week highs yet another large increase from the 225 a week ago.
The S&P 500 saw an even larger weekly increase in constituents that finished below their 200 DMA, to 335 from 235. There were 369 constituents that finished Friday either below their 200 DMA or less than one dollar above it, well above the 263 in the previous week. The index saw 357 constituents finish Friday greater than 10% below 52 week highs, a huge increase from the 252 seen in the previous week.
The large increases seen on the S&P 500 were partially due to several more of the stocks that have been fixtures in the run higher showing weakness. Several had fallen steeply to support above their 200 EMA earlier and then began to trade flatly near this average. Recently they began showing potential support breaks at these levels and during the past week breaks became more evident, with most slipping deeply below the 200 EMA. Many saw these retreats after reporting less than stellar second quarter results or reducing forward guidance. Many of these stocks are trading at high P/E ratios and have left unfilled gaps higher that are considerably lower than their current stock prices. The potential downside in these stocks seems large.
Others that had been helping to push the index higher or maintain the current higher level fell steeply in the past week. Many broke below support levels in these falls and many fell to or below the 200 EMA. It continues to seem possible the numbers of stocks in bullish runs could dwindle as the number in downtrends from these highs appears to be increasing.
The number of constituents with a 200 DMA in decline increased to 193 from 167. This moving average is generally fairly slow to change directions, but the large fall in stock prices along with many that already appeared very near to changing into declines helped to increase this week’s numbers. If the current drop continues it seems likely over half of the constituents could have a 200 DMA in decline within the next few weeks. This increase appears to show a possible breakdown in breadth could be occurring.
The S&P 500 constituents saw current year earnings projections increase by $3.87 during the past week. There were 84 constituents that saw current year projection increases while 64 saw decreases. The past week’s increase was largely affected by companies that reported fiscal year ending results and as a result their current year earnings changed from 2015 to 2016. Although this was seen in earlier reported results too, they appeared to have less of an overall impact. Over half of the past week’s increase was due to fiscal year changes and not increases to existing estimates.
The current quarter earnings expectations for the 16 constituents left to report second quarter results saw an overall increase of $0.01. There was one constituent that had yet to report second quarter earnings that saw projection increases and one saw decreases.
As the current retreat began, many of the constituents had seen rebounds that took them to likely resistances levels. Many have begun to retreat from these resistances, but are still quite far above likely support levels. Many were fully overbought as they reached these levels, making further retreats from these resistances seem likely.
In the stocks that were not near cycle highs prior to the volatile downturn, support breaks were widespread. Support breaks were also seen in some that fell steeply off highs. This left many of these stocks dangling high above likely support levels and with considerable potential downside.
Some of the indicator stocks had rebounded off recent lows earlier; however these rebounds seemed mostly sector related or due to a normal cycle rebound. They were also not widespread across sectors and several continued in downtrends, making it look like a false indication. Many of these stocks have appeared to reach levels they could slip lower from again, and many appeared to be bending lower from these resistances prior to the late week retreat. It seems possible many of these stocks could continue in these retreats and possibly retest or even slip through recent lows. It continues to look like the rebound in those indicator stocks could be a false indication.
The featured and supporting indicators discussed below are not always correct, but they have been many times. Being so they are worth reading about and taking note of.
The 100 L, (-)/(+) 90 D, -/(+) 90 D, +2% H and -2% H indicators are currently active. The +2% and -2% indicators reactivated into a high likelihood due to Thursday’s volatile market move. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 fell to a new low within the significant drop from the May 21 record close of 2130.82 during the past week. Friday’s close of 1970.89 was 7.51% below the May 21 high.
The index covered the gap lower seen on July 9 during the past week’s retreat. It left the gaps lower from previous highs on July 22 and Aug 11 uncovered. New gaps lower were opened on Wednesday, Thursday and Friday. Although all of these gaps lower are likely to be filled at some point, current conditions make it seem possible some of these gaps could remain open for some time.
The index saw Monday’s rebound push slightly above likely resistance from 2085 to 2100 in the lower half of the 100 L with a high of 2102.87. Tuesday pushed slightly higher to 2103.47 before falling to find support within the likely resistance with a low of 2096.92. Wednesday found support slightly above the upper support of the 2065 to 2070 MRL, with a low of 2070.53 before rebounding into the close. Thursday fell to slightly above the lower boundary of the 2035 to 2055 MRL as it closed at the low of 2035.73. Friday continued lower as it finished at the session low of 1970.89, and slightly above the 1970 MRL.
Tuesday’s high again retreated from a somewhat unlikely resistance level, but it was near the upper trend line of the current trend lower. Thursday finished near potential support, but this support did not hold. Friday also finished near potential support, but was falling into the finish, so this level may not actually offer support either. The index has fallen very deeply and very quickly. It is also fully oversold, so this level might offer temporary support.
It also seems possible the index could see a volatile session rebound. If this were to occur, it might seem bullish and could draw investors in looking for another fast and furious rebound like the index has seen in previous retreats as it flattened near market highs. It seems more likely it could be a bearish indication in this instance.
As noted earlier the fast rebounds in those drops seemed likely then. Conditions have changed considerably since though. It now seems possible the reasons the market should retreat could be outweighing the reasons the market should move higher. It was also noted earlier that seeing three or four volatile market sessions within a relatively short timeframe could be a warning sign of an impending larger drop.
Offsetting moves are common during volatile market conditions, but they do not always lead to stock price rebounds. After the market began lower in 2000, it saw its first volatile conditions during two volatile retreats on April 12 and April 14. The next three volatile moves were higher on April 17, 18 and 25. Even after the three rebounds, the April 25 close was 23.15 lower than the market close prior to April 12. In its first 21 volatile moves, ten were 2% or greater drops and 11 were 2% or greater rebounds, the last was a 3.89% move higher on Dec 5 that finished 124.05 lower than the market close prior to April 12. There are several other instances of a greater number of volatile rebounds than retreats producing loses in this and other market crashes or corrections.
The support break at 2040 is also potentially bearish. It seems likely the failure at this support level could turn back into resistance. It also seems likely this resistance could become very stout. The volatile drop from Thursday’s close around 2035 could also strengthen and widen this resistance band.
The (-)/(+) 90 D that became active on May 22, 2015 appears to have bearish potential. This indicator is nearing its expiration period and as a result a 90 E will activate on Sept 16. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.99% / -6.48% / -6.48%
The -/(+) 90 D that became active on July 21, 2015 also appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.00% / -7.00% / -7.00%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
The +2% and -2% indicators reactivated after a relatively short dormancy. This reactivation was due to the S&P 500 seeing a volatile 2.11% drop on Thursday. The presence of volatile daily market conditions in the past show there is a substantial increase in the potential that additional volatile sessions could be seen. As a result these indicators reactivated into high (H) levels of likelihood.
As a result of these indicators reactivating on Thursday, the -2% H indicator provided a correct indication of Friday’s 3.19% volatile retreat. Supporting volatility indicators also remained near extremes and suggests a high potential there could be additional volatile sessions.
The average daily volume increased 4.35% from the previous week. Friday’s drop had the largest volume and Monday’s increase the lowest. The five day volume variance increased 22.28% to finish the week at 74.99%. The five day volume variance increased considerably again during the past week and is within bearish levels.
The index saw volatility conditions return with two consecutive retreats of 2% or greater. Volatile conditions are generally bearish. It is not uncommon for large drops to see large counter moves. Although a volatile rebound could seem bullish, it seems likely any additional volatility could be another warning that a deeper drop is pending.
There is no way to be certain that the current retreat will continue lower. There are many things appear to be happening that have led into larger retreats in the past, making it seem possible that a larger retreat could happen. The past week’s retreat makes a larger move lower seem possible. If this retreat develops, the S&P 500 could be heading for possible support at the lower trend line or lower support line. The lower trend line was at 1865 at Friday’s close. The lower support line was at 1717.
China’s currency devaluation could provide yet another headwind for earnings. Many companies announced cost savings initiatives that will likely produce additional shortfalls in earnings for other companies in the coming quarter. It seems possible current earnings projections for the third quarter are not accounting for these potential shortfalls.
Compared to the same quarter a year ago, the overall earnings growth in the second quarter was very low. There were some very good second quarter earnings reports, yet most of these companies are already priced well forward of likely future earnings.
Current chart formations along with past timelines, softening economic conditions, worldwide stock overvaluations and continued lackluster earnings make it seem possible the S&P 500 could see a large retreat before the end of the year.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. Earlier highs on the S&P 500 could have seen the effects of this resistance level, but the index is still within the influence range of the 100 L since it has not yet reached this resistance level. Therefore this resistance is not yet considered active. This resistance appears to have the potential to cause a significant pullback.
Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.
Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at AOL Finance. Earnings information was gathered from Yahoo Finance, CNBC, Edgar Filings, Scottrade Elite, AOL Finance and Morningstar, although other websites, including company websites, may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com, Scottrade Elite or from those that Ron created from his data. Gold charts used for analysis and commentary were provided by Kitco.
Have a great day trading.
Disclosure: Ron is currently about 59% invested long in stocks in his trading accounts reflecting no change over the past week’s investment level. Although the round level remained unchanged, one issue was purchased due to a fairly long standing buy order filling with the cost of that purchase partially offset by dividend payments. He will receive dividend payments from five issues in the coming week and 19 in the following week. If no further investment changes are made during this time frame, these dividend payments would not change his investment level.
Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.