Monday's Meltdown Makes Tuesday a Critical Day

Posted by jbrumley on December 20, 2021 5:30 PM

Fears of more trouble from omicron ended up getting the better of investors on Monday, despite Friday's late rebound effort. All told, stocks closed about 1.2% lower to get the new trading week going.

We've survived worse, of course. In fact, we've come roaring back from worse. As the often-dangerous saying goes though, this time could be different.

In question is the NASDAQ Composite. As was pointed out in this weekend's Weekly Market Outlook, the NASDAQ was barely holding above the lower boundary of trading range that's been in place since March; another support line has also materialized since early this month. These lines are orange and red (dashed), respectively, on the chart below. As you can see, the lower, longer-term floor was brushed with today's low, and even with the intraday recovery the upper, shorter-term floor wasn't reclaimed. Rather, the composite closed just under it.


None of it means anything yet. The lower boundary of the trading range -- currently at 14,845 -- would need to be broken before entertaining any ideas of a serious correction. And, just for good measure, the 200-day moving average line (green) currently at 14,518 would also need to be broken before assuming the worst. The VXN (at the bottom of the chart) would also need to move above its recent ceiling near 29 before we could safely say stocks are too far gone to save without suffering a big pullback first. The VXN briefly traded above that mark on Monday, but really needs to close above it to be considered game-changing. In fact, it needs to log a couple of closes above that level before we can presume the worst.

Still, as of Monday, all of those are now distinct possibilities.

The S&P 500 doesn't look exactly the same, for the record. But, it looks pretty similar. Today's plunge brings it within reach of a major support level (pink) that connects all the key lows going back to the middle of last year. And, the same move brought the index to within striking distance of the 100-day moving average line (gray). While the S&P 500 ended the session looking like it was going to be moving up and away from those lines headed into tomorrow, it's still dangerously close to that now-converged floor.


The VIX is doing the same dance, so to speak. That is to say, it's pushing upward again, putting pressure on the technical ceilings that lie just above it.

While this all makes Tuesday a big day, we can't necessarily conclude a gain tomorrow is the same thing as an "all clear." Breaking floors and ceilings is often more of a process than an event. Indeed, if you're a bear here then you're probably actually cheering for a small respite from the weakness on Monday so the bears can get something of running start with the effort to crash below the aforementioned support levels. Another really bad day straightaway would actually invite a good deal of dip-buying.

We'll post updates as needed.