Stocks sold off hard this past Friday, with the S&P 500 down -2.5% in one day on the largest trading volume in over two months. Summer vacation is over. The major market players are back at their trading desks. Time to get back to work. As market participants ourselves, this recent volatility should not surprise us. We knew our environment before Friday’s selloff. A week before, we shared the following market characteristic with our followers on Twitter (@360Research):
The following day, we released an article addressing this subject, highlighting important downside support levels on the S&P 500. In that article, we wrote:
If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk.
And since we’re busy patting ourselves on the back, we also shared the following fun fact with our Twitter followers on September 6th:
Three days later, global equity markets and indices saw impressive one-day losses on heavy volume. Bonds were major losers in the global selloff with 10+ year Treasuries and Corporates being hit hard. Correspondingly, yields jumped. In addition, the VIX (a CBOE index which shows the market’s expectation of 30-day volatility) shot up 39%. That, my friends, is increased volatility. The tightest price range in 20 years has been followed by an increase in volatility. Not surprising.
Also not surprising are the nauseating, click-bait headlines. You know what we’re talking about: “Stocks Routed Due To Janet Yellen’s Bad Hair Day.” You never see headlines like, “Stocks Drop Due To More Sellers Than Buyers.” You won’t see that because it doesn’t make financial media money to report the simple truth. They require sensationalism in order to make money. Talk about a conflict of interest!
Thankfully, we don’t focus on headlines. We focus on buyers and sellers, supply and demand. We focus on price.
So where to from here? As always, let’s watch price to determine important levels of supply and demand. Here are the same charts provided last week, but updated with prices through last Friday.
It’s clear the S&P 500 ($SPX) is immediately challenging an upward trendline dating back to February 11, 2016. Also apparent is price testing an important resistance level, which was previously an area of supply between 2100 and 2150. Based on the rule of polarity, this is likely an area where buyers could step into the market.
Below is the daily chart updated from last week’s release.
Again, we see the S&P 500 has entered an area that should provide some resistance/buyers. If the area between 2100 and 2150 does not see buyers step in, a visit to 2000 is likely.
In conclusion, the recent explosion in volatility should not come as a surprise due to the strong seasonal tendencies of September and October. And we don’t need to click on fancy headlines to manage risk. Rather, we have price in front of us to help guide our decision making. Let’s use it.
Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.