S&P 500 Pacing
It’s not over yet! Will the illiquidity reemerge?
Last week’s extreme action was caused mostly by the markets illiquidity last Monday with the Dow Jones down over 1000 at the open. This caused the S&P 500 to trade all the way down to 1867 before beginning a rebound on Wednesday as the extreme volatility continued due to the liquidity issue. We did see reasonable liquidity return on Friday but there were periods throughout the day when liquidity would dry up.
With China down again, this triggered some selling in Europe and the S&P futures. But the most significant negative sentiment came out of the Jackson Hole meetings as no real guidance came out concerning the rate increases in September. Federal Reserve president Fisher suggested that the September hike was still a possibility. As I’ve discussed several times in the past I do not believe that the market actions will be driven by whether the Fed raises rates or not. Market sentiment has changed substantially. Now, after the sharp declines that we’ve seen in the past two weeks, we are likely to see plenty of overhead resistance.
There are many market participants who got caught in that volatility that are looking to sell out of positions if the market rallies. There is a reasonable probability that if key support levels hold early in the week then we could see further movement to the upside.
As we begin this week we will see plenty of economic releases with all eyes ultimately focused on the employment situation due to be released prior to the market open on Friday. Expectations are for 223,000 new jobs and employment to decline from 5.3 to 5.2%.
The big news starts on Tuesday as we are going to see PMI Manufacturing, ISM Manufacturing Index and Construction Spending. Wednesday will see the ADP report and Factory Orders. Thursday’s releases will feature Jobless Claims along with the ISM Nonmanufacturing Index.
I continued expect to see extreme volatility for the next several days and possibly into the end of next week.
|S&P 500 for the week of 08/10/2015|
Looking back on last week
The session began with an extreme broad-based selloff that began overnight in Asia and continued into the US trading session. In the end the S&P 500 was down 3.94% after opening with a 5.3% loss. The NASDAQ finished down 3.8% after starting the day with an 8.8% decline. Massive illiquidity triggered on the opening as there were a lack of bids in many of the primary markets. The big trigger was the Shanghai composite which was down 8.5% as the POC or the People’s Bank of China failed to intervene. They announced that pension funds managed by the bank could now invest in the stock market but this was not enough to stimulate any sort of buying. The NYSE invoked rule 48 which gives the market makers a reprieve from setting prices on the open. There were two interruptions of quotes and halts of market activity to get some stability back into the markets.
Markets started off on a very positive note as the S&P 500 was up nearly 2.9%. But in the last hour of trading we saw some heavy selling coming in to push the market negative on the session as the S&P 500 finished down 1.35%. The NASDAQ outperformed by finishing down only 0.4% after being up on the open over 3.5%. While the market started in a positive note it was surprising as China’s Shanghai composite declined again 7.6%. However, most of the reaction was to the POC’s announcement that it would cut its main lending rate by 25 basis points to 4.6%. This was viewed as a positive but the markets would not know the effects until the opening on Wednesday.
The market started on a higher note and chopped around through midsession. Comments from William Dudley from the Federal Reserve triggered some positive sentiment as he said it was unlikely that there would be a hike in September. The markets took off on a sharp rally into the close as the S&P 500 finished up 3.90%. Meanwhile the US dollar rallied as it was an indication of the carry trade flows that were coming back into the markets. China had also stabilized overnight which also helped to boost a positive market sentiment.
The market opened higher and continued the advances to the upside as the S&P 500 was up 2.43%. There was a late afternoon selloff that looked like it was going to decline like it did on Tuesday but it reversed to close near the highs of the session. The Shanghai index soared 5.3% but most of this was due to an intervention by the POC. Meanwhile crude oil spiked 10.3% up to $42.53 per barrel. This helped keep market sentiment positive into the close. There were still signs of liquidity issues as in the last hour the S&P sold off 30 handles only to recover all of them by the close.
After enduring an extremely volatile week, the S&P traded in a narrow range for most of the session, but finished on the higher end of the session up 0.06% and 0.91% for the week. The NASDAQ was able to edge out a small gain of 0.3% and the Dow Jones was down 0.1% on the session. The NASDAQ finished up 2.5% on the week leading the way to the upside.
With only one session left, the S&P is on track to show a decline of 5.8% for the month. This would be the worst month of August since 2012. The Energy sector continued to climb helping to keep market sentiment stable. Meanwhile, the dollar index was up to 96.12 and the 10 year treasuries made a huge reversal coming back from 1.90% all the way back to 2.18% by Friday’s close.
S&P 500 for 08/28/2015
Friday’s action finished the week in a very choppy session, finishing just slightly higher, up 0.06%. The configuration suggests that if the market can stay above the 1978.20 level today then we should see a challenge of the 1999.55 level. A penetration of this level would suggest a further rally toward the 2011.45 pivot level.
With today being the final closing session of the month it will be critical if we close below the 1985.60 level today. Should that occur, it will set the tone for further downside action as we go into the month of September. Consequently, it will trigger a potential sell on the long-term secular trends. I will discuss this on Tuesday’s market commentary, should it occur.
Furthermore, should the 1978.20 level be penetrated, then this would indicate a decline toward the 1966.30 level which is a key level on the charts at this time.
Most likely what we are going to see this week is continued volatility even though the three-day indicator has declined from 83 all the way down to 45.18. I continued to expect this to decline toward the 22-25 level. This will suggest that we will see the markets stabilize above the support levels between the 1978/1966 levels.
The weekly volatility suggests that the most likely range for the week will be 2040.95 on the upside and 1964.30 on the downside. The intermediate charts are the most revealing at this time. Should the market fail to rally above the 2068.40 level in the next three weeks then it will set the tone for a retest of the 1867 lows.
It does appear that the market should set up a major right shoulder top as there is substantial resistance at the 2068 level. This suggests that there is only a 30% probability for a penetration of this level. There is a 60% probability that the market will begin to decline in the next 2 to 3 weeks ultimately retesting the 1867 lows of last Monday and heading toward the target zone of the1820/1770 levels.
Be sure to tune into the Market Thunder show at 12 noon Eastern Time for the full technical review.
The market should open lower, with a 60 percent probability to close higher, should the market remain above the 1978.20 level today.
Today’s Key Levels
|Prior Close||1988.87 +1.21|
This Week’s Key Levels
|Prior Close||1988.87 +1.21|