OVERSOLD & SUPPORT

 

Downside volatility has increased in early 2018, as discussed in recent Macroeconomic and Technical webinars and research updates. While statistically measured “oversold/fear” levels are close at hand, it is important to distinguish between an equity market “Low” and an equity market “Bottom.”

A Low is a function of price only and is usually accompanied by high-volume selling. Consistent with this and the DJIA’s 4.62 percent decline yesterday, declining volume on the NYSE was 97 percent of total advancing and declining volume, the second consecutive day this relationship was over 90 percent. Also, declining volume on the NYSE exceeded upside volume by a massive 31-to-1 ratio yesterday. One sign that a Low has been established, following volume readings such as described, is strong demand for stocks shows up. A very strong ratio of NYSE advancing volume over declining volume makes this evident.

Once a Low has been recorded, it takes time before a Bottom develops. A Bottom is a function of both price and time and usually includes some type of “Low-Rally-Retest” sequence. When looking at a chart, this sequence usually resembles something akin to a W.

INDICATORS AT OR NEAR OVERSOLD/FEAR LEVELS

 S&P 500. NYSE McClellan Oscillator (Ratio Adjusted) Chart. Oversold levels that usually presage a short-term rally. Volatility Index (VIX). 40 and above usually imply a short-term rally. 
 Chart showing Percent of S&P 500 Stocks Above 20 day - EMA.

SUPPORT

In my opinion, when the equity market is in the midst of algorithmic and index fund trading—which has been the case over the past few days—the selling pressure is not necessarily a reflection of the underlying economic and fundamental backdrop. During these types of periods, I identify support levels in terms of ranges or areas, not at 100 percent specific levels.

 Chart showing S&P 500 with Rising 200 DMA. Trend Line Support (green): 2,600 +/-. Rising 200-DMA Support (blue line): 2,534.
 Chart showing NASDAQ 100 Index with Rising 200-DMA. Trend Line Support (green): -6,430 =+/-. Rising 200-DMA Support (blue line): 6,067.
 Chart showing CBOT 10-Year U.S. Treasury Note Price (EOD) Index. Right at near-term support. Yet stronger levels exist lower. 
 Chart showing the U.S. Dollar Index - Weekly Chart. If there was a point where the odds favor a bounce/rally period by the U.S. Dollar, it is "in and around" these levels. 

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.   

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 02.05.2018. Chart sources: Stockcharts.com.

Download PDF copy of article: Day Hagan Tech Talk February 6, 2018 (PDF)

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Investment advisory services offered through Day Hagan Asset Management, an SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member NYSE, SIPC). None of the entities listed here in this disclosure are affiliated.