The upside of downside

09/24/19
  • Stock market stalled in recent days
  • SPX has traded below July record high for nearly two months
  • Technicians may look for a test of early September breakout level

Everybody knows what the nearby upside target is, but what about the potential downside target?

We’re talking about the stock market, of course, and while people may be less inclined to ponder how far the market’s recent minor pullback could extend (if it does), seasoned traders understand that identifying potential downside targets isn’t just about short selling, it’s a way to think ahead about what could be the next key buying opportunity.

Whenever the SPX rallied within 2% of a prior all-time high, in all instances but one the index hit a new record within 43 trading days.

With the market in the midst of one of its historically weakest weeks of the year,1 and its most volatile month (October) on the horizon, the angst that has accompanied the US market’s stagnation in the wake of its summer highs is perhaps understandable, even if the S&P 500 (SPX) is only around 1% below its record high. It’s the ol’ wall of worry.

So, first things first, the nearby upside target is that current market high—3,027.98 in the S&P 500 (SPX)—set on July 26, a few days before the August sell-off and consolidation:

S&P 500 (SPX), 9/18/18–9/23/19. S&P 500 (SPX) price chart. Longer-term support

Source: Power E*TRADE


Punch above this threshold, bulls hope, and we can look forward to another market upswing during what is traditionally the market’s most bullish period of the year, October–April. But for nearly two months, that level has been so close and yet so far. The longer it remains elusive, the more nervous bulls get about a potential downturn.

And the most compelling nearby downside target? The high of the August consolidation (around 2.938), which the SPX blasted through on September 5, looms large on the price chart. Many traders likely see the potential for the index to play out a common technical pattern by pulling back and testing a conspicuous breakout level. (For reference, take a look at what the SPX did in mid-March after breaking out above its October–November 2018 highs: break out, rally, pull back to/below breakout level, then resume rally—that’s the pattern.)

Here’s the larger context: As mentioned in “Stocks within striking distance,” since 2007, whenever the SPX has rallied to within 2% of a previous all-time high, in all instances but one the index hit a new record within 43 trading days (the median wait was 11 days). Today marks the 13th trading day since September 5, when the SPX first traded to within 2% of its late-July record, so this hasn’t been an exceptionally long wait, although it probably feels that way to some people.

S&P 500 (SPX), 7/23/19–9/23/19. S&P 500 (SPX) price chart. Upside, downside

Source: Power E*TRADE


Finally, the longer-term chart above shows the top of the August consolidation isn’t necessarily just a short-term technical level. It previously acted as a resistance zone that turned back rallies or upswings in October 2018, and April and June of this year.

Is the market destined to rebound immediately if it pulls back to (or below) this breakout/support level? Of course not, although traders should keep in mind the market’s track record of eventually pushing to new highs after trading within 2% of a previous record. Bulls operating with longer-term highs in mind put themselves in a better position by anticipating potential pullback levels than by indiscriminately chasing new highs.

Downside does indeed have its upside.

Market Mover Update: Following through on Friday’s rally, December gold futures (GCZ9) pushed to their highest level ($1,534.40) since September 6.

Today’s numbers (all times ET): S&P Corelogic Case-Shiller HPI (9 a.m.), FHFA House Price Index (9 a.m.), Consumer Confidence (10 a.m.).

Today’s earnings include: Autozone Inc (AZO), Neogen (NEOG), Cintas (CTAS), Carmax (KMX), Nike (NKE), IHS Markit (INFO), Jabil (JBL).

 

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1 MarketWatch.com. The ‘weakest week of the year’ is here, but this is why one strategist isn’t worried. 9/23/19.

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