Given the recent volatility in the stock market, I thought it would be helpful to share with you a few charts and data points that can be useful in this type of market environment.
When trying to forecast the direction of stocks and the overall stock market, traders and portfolio managers use different types of technical analysis. One of the more popular tactics is identifying a stock’s resistance and support levels. The stock market has ceilings (resistance) and floors (support), otherwise known as tops and bottoms. These support and resistance levels are important in terms of market psychology. Over time, we can see a fairly predictable pattern of the markets bouncing off these ceilings and floors. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (support) or sell it (resistance). When these trend lines are broken and the psychology behind the stock’s movements is thought to have shifted, new levels of support and resistance will likely be established.
When the stock market hits a ceiling (resistance), typically there is a short term sell off, with the hopes that any market sell off will reverse and break through the ceiling which in turn creates a new floor (support). Unfortunately, over the past year, the S&P 500 has hit a ceiling around 2100 and has been unable to break through it to higher highs. (See chart below – red line)
When a market is falling, it will typically head towards the floor / support (blue line), which is typically the most recent low. The chart above shows we have a floor forming around 1860, a level the market got close to on Sep 29, 2015, Aug 25, 2015 and bounced off on October 16, 2014.
As long as the market doesn’t break through these lows (1860), it should be a sign that this recent market selloff shall soon pass. Here are the numbers to watch:
- Dow: 15,370.30. It is currently about 1.5% above that floor.
- Nasdaq: 4,292.14. It’s 1.1% higher than that right now.
- S&P 500: 1,860 and 1832. On January 20, 2016 the S&P 500 breached both 1,860 and 1,832.
As long as the S&P 500 and other indexes don’t drop much below these levels, the probability of a bear market happening is quite low. A bear market would be defined as a 20% drop from the recent high of 2134. Unfortunately, if the markets can’t stay above those August lows, then things could deteriorate quickly. At that point all bets are off, and the market could see that full 20% drop fairly quickly.
These are the levels that the major indexes would have to hit in order to be in bear market territory (-20% decline) – as well as the last time they were at that level:
- Dow: 14,681.12 (June 2013)
- Nasdaq: 4,185.56 (October 2014)
- S&P 500: 1,707.78 (October 2013)
We are currently breaching very important levels on the S&P 500, but we still have a little bit to go before the bears come out of hibernation. I hope this update can help give insight on how technical analysis can give some guidance to the stock market’s direction.
At Nicholas Wealth Management, we employ a “tactical rules based” philosophy to help navigate through very volatile markets. I feel in times like these, employing a tactical strategy is key to adapting to ever-changing markets.
Please don’t hesitate to call my office or send me an message if you have any questions.
All the best!