Last week’s market drop-off did considerable technical damage to many charts BUT there are a few silver linings we would encourage investors to consider.

The Standard & Poor’s (SPX), along with many stocks, notably cyclicals, were overbought at resistance heading into the beginning of this week. The SPX has pulled back to the upper end of a very broad support band beginning at its 200-day moving average (dma) at 3013, just above two important support levels. The first is the 62% retracement at 2935 and the second at the 50% retracement, 2792. Interestingly, the rising 50-dma at 2900 is in the middle of the band and serves as a reasonable proxy for the uptrend of the market. I expect those support levels to hold.

Short-term momentum indicators are still early in downturns from overbought levels reached last week. Most daily momentum indicators, tracking two-four-week directional shifts, are only a few days old. In general, a downturn from overbought level suggests two+ weeks of weak/sloppy trading, and next week is an option expiration week.

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Bottom line: Given the velocity of recent moves, I have to weigh the odds of whether an entirely new downside move is developing or equity markets are merely unwinding a very overbought short-t...

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