These are nervous times for traders and investors. Buying could leave you vulnerable for further downside moves, while sitting on the sidelines could see you miss rallies. My feeling is to remain prudent. Don’t worry about missing any rallies, as I’m not convinced that gains are sustainable at this point. This was demonstrated on August 21, when stock markets surged, but then foundered in the three subsequent trading days.
The stock indices remain below key technical levels. I feel that the key will be the ability of markets to hold as we move forward. As such, I continue to be cautious due to a fragile technical picture.
I do not sense any enthusiasm or interest in the market, as the trading volume continues to be muted. All eyes will be on the Durable Goods Orders on Wednesday and revised GDP on Friday. The Durable goods will be critical, as they indicate spending on non-essential goods, such as big-ticket items like furniture and appliances. Consumers feeling confident will tend to spend more on big-ticket items. Moreover, weakness in housing also pressures the demand for furniture and appliances, as homeowners will tend to not upgrade. The overall impact is on GDP.
Technically, the move below the key moving averages is worrisome in the absence of support. The Russell 2000 may test support at 600, as it precariously holds on pressure by economic concerns. The index fell as low as 601.69 on August 23.
Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and fighting to find some support. The Relative Strength is weak.
On the charts, the stock indices are trading at a crux below the key 50-day and 200-day moving averages (MAs) along with the tops on the charts as we discussed in our last visit.
The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.
While there is some decent support on the charts, I continue to see a death cross on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator.
I remain cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.
Be careful, sit tight, and refrain from chasing gains, as I continue to question the sustainability of upside moves to the global market risk. Things should become clearer in mid-October, when the third-quarter earnings are due out.