Thursday’s Stumble Doesn’t Change Everything, But It Changes a Lot

Posted by jbrumley on October 19, 2023 8:21 PM

For a second day in a row stocks lost a good deal of ground. And, in so doing, the market’s timbre took a turn for the worse. Both the S&P 500 and the NASDAQ Composite are now beneath an important short-term moving average line thanks to hints that the Federal Reserve may not be done with its rate hikes. There may be one more in the cards come November.

The moving average line in question is the 20-day moving average, plotted in blue on the daily chart of the S&P 500 below. It’s looked like the index was finding support there of late all the way through Wednesday. The bears found a way to break below that floor on Thursday though.

The NASDAQ Composite did the same thing. That is, on Thursday the NASDAQ fell under its 20-day moving average line (blue) at 13,330. And like the S&P 500, the scope of the selloff suffered on Wednesday and Thursday suggests this selling’s got a head of steam behind it.

That’s not the alarming detail we’re seeing on either daily chart, however. As both charts show us, the NASDAQ Composite as well as the S&P 500 both still have a couple of technical floors below them that could readily stop this selling.

Rather, the more troubling detail we’re seeing on both of the daily charts above is that the indexes’ volatility indexes -- the VIX and the VXN -- both popped above critical technical ceilings. The NASDAQ Composite’s Volatility Index (VXN) punched through its resistance at 23.4 (purple, dashed), while the S&P 500’s Volatility Index (VIX) broke above its recent ceiling at 19.9 (yellow, dashed). This is the first time since mid-April we’ve seen either volatility index above these resistance levels. This doesn’t change everything. But, it does change a lot. Traders are starting to make more speculative bets on downside moves, and/or hedge against more serious selloffs (which will cause the volatility indexes to rise in earnest).

Also notice Thursday’s selling materialized on rising, above-average volume. It’s a sign that more and more traders are getting on board the selling train, filing out of long positions.

Do be aware that Friday is an expiration day (for options). This will induce a lot of selling; it might move the market in a big way. And, given the current undertow, odds are good this expiration effect will work against the market rather than for it. It could even force a test of both index’s next-best technical support levels. For the S&P 500, that’s the 200-day moving average line (green) at 4231. For the NASDAQ, that’s the recent low near 13,000 (light blue, dashed).

That being said, it’s Friday’s likely expiration volatility that should cause you to distrust anything the market does that day. Traders will come back this Monday with a proverbial clean slate.

Of course, regardless of when either technical floor is broken, if-and-when it happens it may well inspire a more persistent wave of selling. The surging volatility indexes are what’s different this time around.

The good news is, a sharp, pronounced selloff might actually be what’s needed most right now. It will hit the proverbial “reset” button and lead into the usual year-end bullishness.

But, first things first.