Going into yesterday morning’s open we have been seeing widespread stock market weakness this week. There was a lot of poor economic data releases to justify the drops, but really the stock market has been forming what looks like a drifting top now for months.
Such action could lead to disaster, but yesterday the S&P 500, DOW, and Nasdaq all tested their 200-day moving averages and rallied off of them. Check out the Nasdaq chart for example.
The green light on this chart is the 200-day moving average. Notice that the daily stochastics indicator on this chart is below the oversold 20 level. An oversold reading near that moving average no doubt brought in technical chart buyers and even more importantly trading robots on Thursday.
Even if there is weakness on today’s open the odds are that this support level will hold here. Many stocks formed identical charts for nice Thursday bounces. Look at FB for example.
FB is oversold and rallied over 2%. If you wanted to play a rally in the market now is the time to buy with stops on the lows of this week. One could do a trade in FB with a stop here and intention of selling into its earnings release at the end of the month on October 29.
A lot of weak stocks that have become extremely oversold also had big up days to suggest a dead cat bounce into resistance for them is coming. Take a look at dope stock ACB for instance.
ACB is not poised to go to new highs, but instead is now poised to jump up into it resistance in the $5.00-$5.50 range. That’s what happens when stocks are this far below their 200-day moving averages.
But would such a rally in the markets be the start of the next move up to new highs or a final rally that will fail? The answer to that depends on the coming China trade negotiations for next week and how the market reacts to them.
I talked about that topic in a quick podcast I posted on the website for you here:
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