With the S&P500 completing its breakdown below 1670 yesterday, it casts a new level of conviction in the VIX that the fear index hasn’t deserved many times over the last 2 years. Time and again we’ve seen spikes higher in the VIX coinciding with market bottoms, this time though it accurately hinted at the 1670 breakdown. Now that SPX broke that level and is on pace to close below it for a 2nd day in a row, you have to adjust your set ups. New key support becomes the 1650-1640 range. Key resistance becomes the 1670-1680 range that was providing support before 1670 broke.
In surveying the individual landscape, lots of “momo” stocks got some air taken out of their sails this week. PCLN, NFLX, TSLA, LNKD, & FB among others, all went from being at all time highs to down 10%+ in just a matter of days. Long term that’s actually a good thing as these drops and (expected) subsequent bounces will give investors and traders alike key reference points to watch moving forward. You’ve already seen that today in FB, which is last trading at $47.25 off of its $45.26 low for the day. That 4% bounce now makes $45-$45.25 a new critical level of support for FB moving forward.
A name like PCLN hasn’t seen the same type of bounce that FB has, but it also didn’t experience as drastic of a drop, although it was quite an impressive 2-day 6.5% drop for PCLN. PCLN though has clear support in the $960-$970 range, and while it did have somewhat of a parabolic move once above $1000, PCLN has actually risen this year in an orderly fashion. TSLA also, down 17% from its all time high to today’s low, but still above key support in the high $150′s/low $160′s. Yes the momentum came out in these names but their charts aren’t yet making the sounds associated with that of a bubble popping.
What would change my view that these dramatic, but not devastating pullbacks, are turning into a much bigger problem for the market is if a stock like PCLN breaks $970, FB breaks $45, TSLA breaks $160, or NFLX breaks $280. Until that happens though, I expect choppy sideways action in the market with upside potential. I’m not yet in the camp that SPX is destined to test its August lows in the 1620′s, but I’m also starting to believe that we may not make new highs for the year. The bears are winning the battle but the bulls have been winning the war for 4 years now (more like 115 considering where the market started at its inception). We could just be due to bounce around for a few weeks, regardless of a debt default or avoidance of one.
Bottom line: Don’t get aggressive long until SPX regains 1680 and don’t get aggressive short until SPX loses 1640.
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