Bears Resurface as Volatility Spikes

8:00am (EST)

The stock market sank on Friday following weaker-than-expected economic news and the ongoing uncertainty over tariffs. Specifically, the University of Michigan consumer sentiment index fell to 64.7 in February, a whopping decline of nearly 10%. The technical damage was noticeable with the losses also representing the worst trading day of the year.

The Nasdaq tested a low of 19,510 while closing at 19,524 (-2.2%). Key support at 19,500 held. Resistance is now at 19,750.

The S&P 500 settled at 6,013 (-1.7%) after sinking to a late day low of 6,008. Key support at 6,000 held. Resistance is once again at 6,100.

The Dow bottomed at 43,349 before ending at 43,428 (-1.7%). Key support at 43,250 held. Resistance is at 44,000.

Earnings and Economic News

Before the open: Domino’s Pizza (DPZ), Berkshire Hathaway (BRK), BioCryst Pharmaceuticals (BCRX), Owens Corning (OC), Summit Therapeutics (SMMT)

After the close: Cleveland-Cliffs (CLF), Diamondback Energy (FANG), Hims & Hers Health (HIMS), Riot Platforms (RIOT), Zoom Video Communications (ZM)

Economic News

None

Technical Outlook and Market Thoughts

We often talk about the bulls taking the stairs to higher highs while the bears prefer elevator drops to lower lows. We have also been highlighting a month long trading range for the major indexes along with volatility and how February can be a tricky month to trade.

All of these conditions made for a possible explosive move forthcoming the longer the trading ranges played out and that is what we saw on Friday. Key support levels and the uptrend channels were breached and failed to hold, for the most part, with the pre-warnings from the blue-chips and small-caps playing out as predicted.

Let’s start with the Russell 2000 as it was hit the hardest and the index we have been focusing on the most. The small-caps tumbled nearly 3% to close a point off the session low of 2,194. Key support at 2,200 and the 200-day moving average failed to hold. This reopens downside risk towards 2,175-2,135 with the January 13th intraday low at 2,158. It also represented a 12% selloff from the November 25th all-time peak at 2,466. Dip buying immediately came in with the 200-day moving average getting stretched but holding.

Resistance is at 2,225 followed by 2,260. It is imperative the small-caps at least recover 2,202 and the 200-day moving average on Monday’s close and continue to build off that the rest of the week.

The S&P held its uptrend line and key support at 6,000 and the 50-day moving average. An adjusted uptrend channel shows stretch down to 5,975 to account for the January 13th low at 5,773. Continued closes below both these levels would suggest a further slide to 5,850. A drop below 5,850-5,775 would suggest risk towards 5,700 and the 200-day moving average.

Resistance is at 6,100 with last Wednesday’s all-time top at 6,147.

The Nasdaq closed below the bottom of its uptrend channel with backup support levels at 19,500-19,250 coming into focus. The February 3rd low kissed 19,141 and the January 27th low reached 19,204. On both occasions, the 19,250 level held. Additional help is at 19,000-18,750 on continued selling pressure with the January low at 18,831.

Lowered resistance is at 19,750 and the 50-day moving average followed by 20,000. The chart shows a triple top breakdown has formed just above the 20,000 level at 21,000 and is typically a bearish development for lower lows.

The Dow fell out of a 21-session and 1,000-point range between 45,000-44,000 on Friday. Key support at 43,250 held. The previous uptrend channel off the December 18th, 19th, and 20th lows failed to hold. However, a readjusted uptrend channel off the January 10th and 13th lows still shows key support at 43,250 with stretch down to 43,000. The aforementioned lows were another 1,000+ points lower just below the 42,000 level and represented a 7% selloff from the December 4th all-time top at 45,073.

Lowered resistance is at 43,750-44,000 and the 50-day moving average which we mentioned was showing signs of rolling over.

The Volatility Index (VIX) spiked 16% after reaching an intraday peak of 19.03. Key support at 20 was challenged but held. There is upside stretch up to 22-24 with a close above the latter likely leading to panic selling in the market.

We talked about the 50-day moving average showing signs of overtaking the 200-day moving average to form a golden cross. This is typically a bullish sign for higher highs and would confirm ongoing bearishness in the market.

The last four Friday’s have been bearish with losses or slight rebounds on the following Monday and again last Tuesday. This is signaling cash is moving to the sidelines as traders are expecting lower market lows.

There is still risk the current or lowered tax rate won’t get extended or made permanent by Congress and that would be a very bearish development for the market. The talk of possibly two bills instead of one is also creating some market turmoil as the time frame would extend into the latter part of this year.

We wanted to list the mid-January lows as the bears will be gunning for these levels over the next few weeks and into March. It remains to be seen if they will be tested, but more importantly, if the dip will once again be bought.

Timing market tops and bottoms is extremely hard but our charting helps us identify upcoming and major trends. Obviously, any bullish positions over the near-term will likely suffer on a continued market pullback but the dip buying has been ecstatic with very quick v-shape recoveries afterwards.