Article / 16 November 2015 at 14:00 GMT

US Stocks: Perspectives on a much needed breather

Trader /
United States
  • US stocks finally take a breather
  • Still a bull market in S&P 500 until 2009 support goes
  • S&P 500 may already have seen its 2015 peak
wall street
 Investors looked in vain for some Christmas sparkle last week. Photo: iStock

By Serge Berger

After the sharp rally in October and early November US stocks finally took a breather last week and closed broadly lower in what so far looks to be an orderly pullback. If we dig a little deeper under the surface, however, last week's drop also caused some decent technical damage that may cramp the style of the autumn rally more than what the bulls may admit to. Yes, stocks do tend to drop faster than they rally, but with its 3.60% drop last week the S&P 500 essentially erased a three-week rally in a few trading days.

As they say, risk happens fast. So you know, bullish sentiment from a host of institutional investors coming into last week was high and many investors I spoke to saw a pullback unlikely before year-end but rather foresaw the Santa Claus rally and magical pixie dust carry us higher in a straight line into early 2016. And so those investors that chased stocks higher over the past few weeks once again are left holding an empty bag. 

Not even multiple speeches by the European Central Bank's Mario Draghi and a barrage of Fed speakers could give stocks a sustainable bid last week because, well...gravity in the stock market just as in physics always has a way of returning.

For reference, note that the benchmark S&P 500 continues to hold its 2009 support line after yet again bouncing off there in August and September. Until this line breaks from a trend following perspective purely looking at price in this index, the bull market remains intact. Not until it is broken will larger institutions likely freak out and lead to a better price correction and quite possibly a first cyclical bear market in what I believe to be a new secular bull market that will have many years left until completion.

Bull market will stay as long as the 2009 support remains intact:
S&P 500

Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more

Prudent investors and traders, however, like to think in scenarios through the lens of risk management. Such thought process now has me wondering whether the S&P 500 has already seen the highs for the year and whether we will see a similar pattern play out as we saw in November/December of 2007. 

On the following chart I highlight in blue the October through December period of 2007. Note that a late summer selloff gave way to a sharp rebound in the autumn months but that this rally began to fizzle and by year end most of it had once again been retraced, which then led to further losses in early 2008 and beyond. To be clear, this is not my base case as from a wave counting and performance chasing perspective I do think we have one more rally attempt left in the index, but it is certainly a scenario not to completely discount for that would reflect a degree of certainty in one's analysis, which is a deadly way of thinking about markets.

S&P 500
Source: eSignal

Looking at the charts with weekly bars we however also note that last week's bearish reversal on many indices came right near their respective 50-week simple moving averages. Those moving averages were good support reference lines for years and now acted as resistance. The following charts of the S&P 500, Russell 2000, the Dow Jones Industrial Average and shares of Apple show this quite clearly.

S&P 500:
S&P 500
Source: Saxo Bank

Russell 2000:
Russell 2000
Source: eSignal

Dow Jones Industrial Average:
Dow Jones Industrial Average
 Source: eSignal

Apple Inc
Source: eSignal

The Nasdaq 100 ETF (QQQ) last week rejected its previous up-trend line and filled an important up-gap from October 23 and while arguably still somewhat overbought in the near term is in much more neutral territory than it was just one week ago.

Nasdaq 100
Source: eSignal

Plan for this week

Most of my short-side plays from last week already reached their price targets on Friday and I have taken great profits on many of those positions. Coming into this new week and
after Friday's horrific events in Paris, this coming week may see a spike in volatility at the outset where a real flush lower may offer buying opportunities for a bounce. Watch for any potential bullish reversals, i.e. bearish exhaustion to possibly begin nibbling on stocks and indices again from the long side, for a trade for now.

– Edited by Clare MacCarthy


Serge Berger is a specialist in swing trading/trend following


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