The market finally threw in the towel this morning, with a 2% gap down at the open, and it continued down from there. What was an orderly consolidation, following a strong move off the September low, changed on today’s gap down.

Please take a minute to read the Mid-Week Update that posted last night. This will give you some excellent context with respect to the market’s close yesterday and its open today.

Long Term Perspective (Weekly)

The tech heavy Nasdaq Composite Index has been driving the recovery rally since the CoVid low in March. In fact, the Nasdaq is up almost 100% since the March low! Going up that far, that fast has resulted in the price becoming EXTREMELY over extended versus its 50WMA and 200WMA (Weekly Moving Average). Below is the 8 year weekly chart of the Nasdaq. Here are the important take-aways from this chart:

  • The 10WMA (Week Moving Average) is the first level of support. When it is violated, the next support level is the 50WMA.
  • Historically, the 10WMA runs about 5% above the 50WMA. Currently, the 10WMA sits 14% above the 50WMA.
  • If support is violated at the 50DMA, the next level of support is the 200WMA; currently 30% below the 10WMA.

Until the Nasdaq gets back above its 10WMA, the risk of a significant move to the downside is very real…

Short Term Perspective (Daily)

The 3 month daily chart of the Nasdaq below allows us to drill down. The 200DMA generally corresponds to the 50WMA, the next expected support level. IF the price were to fall to the 200DMA, that would be my first expected support level to consider reallocating back to the stock funds. As an aside, the market frequently reverses direction at round numbers. IF the Nasdaq gets below its prior low at 10,500, I would expect a bottom at/around 10,000; a huge round number AND just above the 200DMA.

The 3 month chart of the S&P500 (C Fund) is very similar to the Nasdaq. Today’s gap down ends any hope of support at the 50DMA. The next possible support is the September low but, I would expect the price to decline to the 200DMA. This probably will not happen in a straight line but, we are likely to see 3150 before 3600 again…

Bottom Line: The gap down today on the major indexes changed everything. The 50DMA is now resistance on the upside and the 200DMA is the next major support level on the downside. The 200DMA is currently about 5% below the current price of the S&P500. We will watch the market very closely with an expectation to get back into the stock funds at/around 3150 on the S&P500.

Jerry