Tuesday's Drubbing Takes the Market to the Brink

Posted by jbrumley on September 13, 2022 9:07 PM

Just when it looks like things just might start taking a prolonged turn for the better, WHAM! The S&P 500 fell 4.3% on Tuesday, shattering bullish hopes on clear signs that inflation is anything but tamed. The Fed's tentative plans to raise the Fed Funds Rate by three-quarters of a point are now all but assured, and investors don't like it.

And yet, as rough as Tuesday was, it didn't break the market's back.

Take a look at the daily chart of the S&P 500 below. The selloff was steep to be sure, pulling the index back under all the key moving average lines it worked so hard to crawl back above last week. It didn't slide under the technical floor (green, dashed) that's been propping it up since mid-June though. Tuesday's low only tested that floor.

The S&P 500 Volatility Index is making a mirror image of the move, bumping into a key technical ceiling at 27.8 without actually moving above it.

Here's the daily chart of the NASDAQ Composite. Unlike the S&P 500, the composite did break below a key technical floor at the same time it fell back under its key moving average lines. The NASDAQ's volatility index is also testing a major technical ceiling at 33.7, although it hasn't yet hurdled it. It's testing that line in the sand though.

Let's back out and look at a weekly chart of the NASDAQ Composite though. From this vantage point we can see Tuesday's close at 11,633 is suspiciously in line with recent highs and lows, and also several weekly opens and closes in June. Perhaps without even realizing it, traders are plotting a mental line in the sand here.

The best thing going for the market here is the sheer size and scope of the selloff. With a 4% plunge (the worst day for the market since the middle of 2020), more than a few prospective buyers are seeing some beaten-down stocks as bargains worth taking a shot on. The futures are up heading into Wednesday's action.

Don't be too quick to jump on that bullish bandwagon though. That may well be little more than a dead cat bounce, with a renewal of the weakness due following just a little bullish relief from a short release of the bearish pressure valve, so to speak. The indices will have to fight their way back above the thick band of resistance they pushed through last week to start entertaining real bullishness again. The buyers may not be so stoked about doing that much work.

It's not all bad though. One more sharp pullback through the end of this month -- a surprisingly common occurrence -- could easily set up the true rebound rally that so often takes shape in the fourth quarter of the year anyway.