One of the first principles taught to beginning stock traders for reading charts is “Higher highs and higher lows form an uptrend and lower highs and lower lows form a down trend”. Ever since the fed announcement last week, traders watched the chart to see if the June lows would be broken. Until about 1:30 pm ET today, it appeared that the Standard and Poors 500 index (SPX) was finding support at the June lows around 3640, but then it broke down and steadily declined into the close. SPX closed at 3586, down 55 points or -1.5% on the day and down 2.6% this week. SPX declined 8.9% in September. As one might expect on a dramatic break lower, trading volume spiked to 3.5 billion shares, well above the 50-day moving average (dma) at 2.3 billion shares.
VIX, the volatility index for the S&P 500 options, opened and closed today at 31.6%. The range was unusually large with a low at 29.4% and a high at 33.3%. This suggests that the decline late this afternoon didn’t panic the traders. Perhaps the large institutional traders were already adequately hedged.
I track the Russell 2000 index with the IWM ETF. IWM’s trading pattern differed from the S&P 500 in that it essentially traded sideways all week (down 0.3%) and never reached its June low. IWM closed today at 164.92, down 1.21 or -0.7%. The Russell 2000 normally leads the market lower in a correction, so today’s trading was a bit of a surprise.
The NASDAQ Composite index followed the S&P 500’s decline this afternoon but NASDAQ didn’t break its June low and didn’t spike its trading volume. NASDAQ closed at 10,576, down 162 points or 1.5% on the day and down 2.4% for the week. NASDAQ’s trading volume was at or below the 50 dma all week. The selling pressure in the NASDAQ stocks was much stronger earlier this year but it appears the sentiment has shifted.
The market gave every indication this week that it was finding support at the June lows. At first blush, this afternoon’s late decline appeared to break that support level, at least on the S&P 500 stocks. But SPX’s implied volatility was unchanged on the day – interesting. I would have expected it to spike higher with the selling pressure this afternoon. Both NASDAQ and the Russell 2000 have not yet broken their June lows.
I am more inclined to believe today’s trading was a test of the previous lows rather than a break that will lead the market significantly lower. But I am not going to test that hypothesis with my money or my clients’ money.
My recommendation remains the same. Stay on the sidelines until we witness a clear bounce from the June lows. Be patient. It is better to miss a bit of the turn higher rather than find that you jumped back in too soon.