Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Where To Catch The Falling Knife?

Published 06/04/2013, 12:20 AM
Updated 07/09/2023, 06:31 AM

Over the weekend we mentioned that although the S&P 500 Index (SPX) has painted three very ugly daily candles in the past few weeks we still believe we’re merely seeing some healthy consolidation. Our only concern at the moment is event risk, not general market weakness. As a result, we’re fairly long in our portfolio allocations, but watching our market risk indicator very closely.

In order to guess how far the market will retrace, we like to use very simple tools like trend lines, moving averages, support levels generated from the Twitter stream, and Fibonacci retracement levels. What we look for is a cluster of support.

Take a look at the chart below and the 1600 area on SPX jumps out as a likely level for the first major bounce (or even bottom) of the consolidation. Here are several ways we arrived at that number.
SPX

  • One fairly reliable chart pattern that we like occurs when price falls sharply for a few days and then consolidates higher (and then breaks the most recent low of the upward consolidation). In mid October of 2012 the market experienced a few days of sharp selling. Then over a week or so it consolidated by grinding slowly higher. One day of sharp selling broke the bottom of the consolidation. By taking the high of the rally and subtracting the middle of the consolidation a projection near 1360 on SPX was given (red lines in the chart). By using the same method today we get a rough downside target near 1613 (red lines again).
  • This level also lines up with the 50% Fibonacci retracement level of the run out of the April lows.
  • Our first Twitter support level is at 1600 on SPX.
  • The trend line created from the November and December closing lows is currently in the same area.
  • The recent break out high at 1598.
  • The 61.8% retracement level just below 1600.
  • The 50 day moving average just above 1600.
Put them all together and we get a pretty large cluster of support between 1613 and 1600. Market participants seem to like round numbers so we suspect that 1600 will act as a magnet. The market should get a good bounce from that level.

One thing to watch if/when the market gets near 1600 is the action of the current leading stocks. Here are the symbols for the stocks we’ll be watching (as they’re currently on a Twitter sentiment buy signal) Ford (F), Citigroup (C), Goldman Sachs (GS), Research in Motion (BBRY), Cisco (CSCO), Bank of American (BAC), Amazon (AMZN), and the iShares Russell 2000 Index (IWM).

Here are a few symbols for leading stocks that have consolidation warnings. If they break down it could be early warning that the market is going much lower. First Solar (FSLR), Microsoft (MSFT), and Chipotle Mexican Grill (CMG).

A few more symbols that are interesting are stocks that have been in a down trend, but are currently signalling a counter trend bounce (Baidu (BIDU), J.C. Penney (JCP), Caterpillar (CAT)). If they can recover trend lines and moving averages then it’ll be a good sign for the broader market.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.