Another Five Percent Down for the S&P 500, at the Minimum?

Though making money is important, that’s not the be-all and end-all behind smart investment strategies. Just think about the common phrase “a dollar saved is a dollar earned.” 

Success in trading and investing means you need to be aware of both the upside and downside risks, such as we are seeing now as the stock market moves lower. 

In general, investors should hold off on buying for now until we see some solid opportunities. Trading volume is rising on the down days, which confirms the selling pressure. As well, the Dow Jones Industrial Average has declined for five straight sessions, losing nearly four percent in that time. 

A look at the chart of the S&P 500 makes me nervous. The index is searching hard for technical support on the chart after dropping below both its 50-day and 200-day moving averages (MAs), as shown on the chart below. The break, while worrisome and bearish, is not a big deal unless we fail to see the emergence of any strong oversold technical buying support. 

You want to see high volume on the buy side, as it shows mass market participation and a willingness to buy. Light volume would not be conducive to a sustainable buying support. 

Now, as a chartist, one needs to watch several key technical support levels where there has been some buying in the past. The first is around 1,770. Failure to attract sufficient buying support here could see the S&P 500 run downward toward the key 1,700 level, last encountered on October 15, 2013.

Chart courtesy of www.StockCharts.com 

Should the S&P 500 decline to 1,700, it would translate into a stock market correction of about 8.1% from the January record-high. That’s not enough to signal a stock market reversal, but it would be enough to get us looking at accumulating positions. A move below 1,700 would really make me run in and pick up depressed stocks. 

Also take a look at the chart below, which reflects the percentage of S&P 500 stocks trading above their 200-day MA. As you can tell, the current reading of 70.4% is weak and well below past readings, when the indicator signaled a trough, as shown by the blue ovals on the chart. In August, October, and December, the reading fell to the 70% level, and in each circumstance, the S&P 500 subsequently rallied. Now I’m not saying it will be the same this time around, but the historical moves support this.

Chart courtesy of www.StockCharts.com 

We could see the S&P 500 fall another five percent to 1,700, but you should be getting ready with some cash to accumulate positions or buy index exchange-traded funds (ETFs) to play a potential bounce. 

In fact, I love chaos as an opportunity to buy, especially at a time when stock market participants are heading for the exits and dumping position after position along the way. 

~ by George Leong, B. Comm.

This article was originally published at Daily Gains Letter