Is the Carnage Over?

Last week equity markets officially hit correction territory before bouncing off the lows of the week to finish up on Friday.

So, is the carnage over?  Are markets done selling off?

From a technical analysis story, the jury is still out.

What was significant in the pricing action is the 200-day moving average for most of the major indexes.  This seemed to be the line in the sand where buyers stepped in and turned things around.  From there, the markets moved sharply higher.  Over the weekend the futures markets are indicating a continuation of this trend.  So — good sign.

Before we call the ‘all clear’ signal, we need to look at some of the bigger-picture issues though.

First off, the bigger picture has been a series of lower highs and lower lows.  So this trend has been one with big volatility and stair-steps down.  Even while futures are pointing to a gap higher at the open — and a push toward as high as 2650 perhaps — the level on the futures to watch is 2686.  That was the last peak in the futures that would need to be passed in order to break the pattern of lower highs.  We see that, maybe we can start getting excited that buyers are stepping back into this market.

Overall, market conditions appear to be oversold.  Still, caution is the word of the day.  There was significant sentiment damage last week.  And a case can be made that the markets are going through a re-evaluation period to determine the next regime of analysis.  With the Fed ‘normalizing’ rates, the ‘Fed Put’ may be over.  What will be the next key element to watch that drives things higher or lower?

On top of that, we had easily the largest single-weekend shift in the BigFoot database in over two years.  The database slipped from 68% long all the way down to 48.66% long.  That means roughly 20% of the database got sell signals — or nearly one third of every long position in the system.  A move of that significance shouldn’t be ignored.

Granted, the BigFoot algorithms are built around volatility as a key component of the decision factor.  And the volatility spike has been huge.  It’s possible to get a false signal if volatility were to somehow wash back out of the system as quickly as it appeared a couple weeks ago.  It’s difficult to find a scenario where such conditions would manifest in real life though.

So caution is the deal.

The Macro indicators are still long in the system.  They’ve slipped some – but nothing like the algo database.  The Macro’s still paint a picture of an overall healthy market and economy at this time.

So what we have is a mixed bag.  The markets are over-sold, and the volatility algo’s have lit up like Christmas.  But the Macro’s are still long, and haven’t shifted much.  So…  caution…  wait and see.

Since the major indexes all found support at the 200-day moving average last week, this is the key area to watch for support right now.  Alas, indexes also fell below their 50-day and 100-day moving averages.  So these will be resistance – with the 50-day being the number to watch, as the S&P500 is sitting close to the 100-day already.

Hang onto your hats gang.  We may be in for another volatile week.  We’ll see if the S&P500 can re-take the 1700 level.  It looks promising – and if it happens – good technical sign.  We’re re-evaluate from there.

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