Sharp Market Decline Holds Key Levels

The bullish stock market euphoria on Black Friday did not last long, as the imposition of steel tariffs by President Trump on Argentina and Brazil pushed the stock market sharply lower early last week. Many felt that this was another misguided strategy, as Trump's goal in imposing these tariffs was to punish these countries for the weakness of their currencies, which he claims is intentional currency manipulation. In reality, however, Brazil and Argentina's currencies are weak primarily due to low commodity prices.

It should also be noted that Brazil sells more than 10 times the farm products to China than it sells steel and iron products to the U.S. If anything, this move pushes away Brazil as a trading partner, further into China's orbit.

The stock market slide only lasted two days, though, as the major averages closed the week well above their lows. The S&P 500 had a low on Tuesday of 3070, but recovered to close the week positive, 75 points higher at 3145.91. The Dow Jones Utility Average and iShares Core S&P Small-Cap ETF also closed the week higher.

When a market average drops sharply, it is important to have an objective method of assessing support levels. One method is to use pivot analysis. In July, I covered quarterly pivot analysis and how to find and watch pivot levels. In addition to watching the daily and weekly starc bands as levels of important support, I also use monthly pivot analysis. Monthly pivot levels are based on the prior month’s high, low, and closing price.

In reviewing the action before the stock market opened on Wednesday, December 4, I noted that many stocks were oversold and had reached key price levels for a rebound. The major averages behaved similarly, as the chart below shows.

The daily chart of the S&P 500 shows that the low on Tuesday, December 3 of 3070 (point 1) was well below the daily starc- band at 3095, and just slightly lower than the monthly pivot's first support level at 3076. The daily On Balance Volume (OBV) had just pulled back to its upward-trending Weighted Moving Average (WMA). Therefore, in my pre-open commentary I said that “this week’s action looks to be a pause in the stock market’s positive intermediate trend”.

Most of the other averages, except the Dow Jones Utilities, also dropped below their daily starc- bands and their monthly pivot levels early in the week before turning higher. Of course, the stronger-than-expected monthly jobs report fueled heavy stock buying on Friday.

The weekly chart of the Spyder Trust (SPY) shows the bullish completion of the trading range (lines a and b) at the end of October. The decline last week held well above the major support at 301.54 and the rising 20-week Exponential Moving Average (EMA). The weekly S&P 500 advance/decline line shows a very strong trend as it has been above its WMA since January (see arrow). This continues to be a bullish sign for the intermediate-term stock market trend.

The yield on the 10-Year T-Note also bottomed on Tuesday, as it had a low of 1.693% before closing the week at 1.842%. The daily chart shows that the upper boundary of the trading range that began with the early September low is near 2% (line a). A move above this level would be a sign of even higher yields in 2020.

On the downside, a drop below 1.662% (line b) will indicate that the recent rise in yields is just a pause in the major downtrend. The daily Moving Average Convergence Divergence (MACD) and MACD-His are on the verge of turning positive.

The Federal Open Markets Committee (FOMC) has its last meeting of the year on Tuesday and Wednesday this week. Last week, I discovered the CME Group's FedWatch Tool, which tracks the likelihood of change in policy by the FOMC. Currently, this tool reflects a 99.3% probability of no change at this week's meeting. Beyond the FOMC announcements Wednesday, we also get the Consumer Price Index (CPI) on Wednesday, the Producer Price Index (PPI) Thursday, and Retail Sales on Friday.

In last week’s review of the most overbought Dow stocks, the data indicates that even market leaders like Apple, Inc. (AAPL) are not yet extremely overbought now, as they were in September of 2018. However, they could become similarly overbought in the early part of 2020.

Health care has been one of the top sectors in the past month, so I will be reviewing the positions I recommended in my November 9^th article late next week.

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