Wednesday, October 28, 2020
Let down and hanging around
Crushed like a bug in the ground
Facts: -3.73% lower, Volume higher, Closing range: 2%, Red Body: -90%
Bad: Gap down, deep red candle, ending at the days lows, broke below 50d MA
Highs/Lows: Lower low, lower high
Candle: Very tiny wicks on either side of a fat red body
Advance/Decline: 0.16, 6 decliners for every one advancer
Sectors: All sectors down, Real Estate ( XLRE -2.22%) and Financials ( XLF -2.56%) held up best.
The day was not so much of a surprise but still hurts for a bull in the market. Sure, there were hopes for a bounce off the 50d MA or bulls coming in at the end of the day to buy the dip. But none of that happened. The Nasdaq finished down -3.73%, well below the 50d MA and testing the round number area of 11,000. Round number support is created by the tendency for investors to pick big round numbers as buy/sell triggers. The candle has a huge 90% red body with tiny wicks on top and bottom and a dismal 2% closing range. There were many more declining stocks than advancing stocks at a 6:1 to ratio with the broader NYSE seeing a 10:1 ratio. Volume on the Nasdaq had a huge 28.4% increase over the previous day and is above average volume for the past 50 days.
Indexes and Sectors
The S&P 500 ( SPX -3.53%) and Dow Jones Industrial Average (DJI -3.43%) indexes also saw big losses on increased volume . The Dow Jones Industrial went below September lows. The Russell 2000 (RUT -2.98%) faired slightly better, but still saw big losses. All sectors were losers with Real Estate (XLR -2.22%) and Financials ( XLF -2.56%) holding up the best. Technology ( XLK -4.24%) was the worst sector of the day. Communication Services ( XLC -3.93%) and Energy ( XLE -4.18%) also underperformed the SPX index, with Energy having some positive gains after Crude Oil Inventories were announced, but later selling off. Utilities ( XLU -2.91%) was strongest in morning trading, before giving up to the excessive selling.
Treasury Bond spreads stayed about the same as the previous day. This is something to keep an eye on, but the spread is still in an upward trend channel from an August pivot .
The mega-caps were all impacted by the selling with Microsoft ( MSFT -4.96%), Apple ( AAPL -4.63%), Google ( GOOG -5.46%), Amazon ( AMZN -3.76%) all dropping significantly. All of them closed below their 50d MA. Add Tesla ( TSLA -4.29%), Facebook ( FB -5.51%) and every other company over 200B market cap to that list. Not even one was spared. On the other hand, there were some bright spots elsewhere in the market. Chewy ( CHWY +6.33%) continued its breakout despite the heavy selling. Twilio ( TWLO +3.73%) finally got some credit for a good earnings report after selling earlier this week. Pinterest (PINS -6.23%) turned a big loss into huge >30% gains after the market closed thanks to their earnings report.
Looking ahead to Tomorrow
Tomorrow is the week’s big day with an enormous number of companies announcing quarterly earnings including Google , Amazon, Apple , Facebook , Starbucks ( SB -3.30%) after market close. Shopify (SHOP -5.19%) will release earnings before market open. The big economic news tomorrow will include the Gross Domestic Product. It is expected to show a record amount of growth but remember that this quarter will follow the worst quarter in history, and it is not an indicator of future economic activity. Any initial excitement in the market on this data alone, would certainly sell off without additional reasons to support gains.
Trends, Support and Resistance
For trend lines and expectation circles, I’ve grayed out the trend lines from the 9/3 correction start and the 9/24 bottom. These trend lines have lost significance against the current trend lines , and I’ll remove them in the next update. However, the trend from the 10/12 pivot day (which becomes the top in the current wave), and the 5d trend provide for the possibility of a +1.56% gain tomorrow. This would put the index just below September resistance area that held prices down in early October.
Continuing today’s trend which was mostly flat after the initial sell-off would mean a -0.49% loss tomorrow and would break through the 11,000 round number resistance. Beyond the trend lines , there are two support areas to watch for. The first is at 10,600 which is where we found the bottom of 10,519.49 in September. Breaking through this area would be dangerous as there is not much trading activity in the second half of the year in between that line and the June support area of 10,000. I have added back the future possibility of reaching that line. An additional -8.18% loss to that area feels within the realm of possible outcomes.
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