Technical Strategy

Slide Does Technical Damage But Doesn’t End Rally Mode

Robert Sluymer
Robert Sluymer
Managing Director and Technical Strategist
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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.

Slide Does Technical Damage But Doesn’t End Rally Mode
Source: Fundstrat, Bloomberg

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-term condition. I think markets will find support near the support bands highlighted above. Could a multi-month, intermediate-term correction be taking hold? Yes, that is a possibility foolish to ignore, but it is premature to draw that conclusion.

I continue to favor a barbell strategy of secular and cyclical growth using pullbacks in each to further accumulate exposure. Bellwether stocks at each end of the barbell remain attractive technically for long-term investors despite recent weakness. Growth bellwethers: Despite this week’s sell-off, AMZN and NFLX remain in longer-term uptrends

Cyclical bellwethers: Please consult our “epi-center” stock list on the website. This week’s collapse interestingly retraced 50-62% of their May 14-early June rebounds, which are retracement levels that often provide support in corrections. We expect these levels to hold and would use recent weakness to accumulate these stocks for those accounts with flexibility to own deep cyclicals. Investors should continue to focus on the more important technical event developing within equity markets, the rotation toward oversold/bottoming cyclicals.

Slide Does Technical Damage But Doesn’t End Rally Mode
Slide Does Technical Damage But Doesn’t End Rally Mode

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Robert Sluymer
Robert Sluymer
Managing Director and Technical Strategist
Share
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