SHORT-TERM STOCK BOUNCE HAS PROBABLY ENDED -- A RETEST OF SUMMER LOW NOW APPEARS LIKELY -- VIX BOUNCES OFF 20 SUPPORT LEVEL
RETEST OF AUGUST LOWS LIKELY... The short-term bounce that started nearly a month ago appears to have run its course. That suggests that a retest of the August low is more likely. I recently applied Fibonacci retracement lines over the Dow Industrials to show where new selling might appear. Chart 1 shows yesterday's downside reversal taking place right at the 50% retracement line (on rising volume). Initial chart support is seen near 16000. But the shape of the recent rally suggests that support probably won't hold. Yesterday's downside reversal day, combined with today's downturn, has given the recent short-term pattern the look of a "rising wedge" which is a bearish pattern. That's defined by the two converging trendlines applied to the daily bars on the S&P 500 in Chart 2. The hourly bars in Chart 3 show the two trendlines more clearly. A downside violation of the lower support line would confirm the rally failure. Money leaving stocks is moving into bonds. Gold prices are also bouncing. All market sectors are in the red with the biggest losses in energy, materials, and financials. Banks are being hurt by falling interest rates. Rate-sensitive utilities and REITs, which usually bounce with bonds, are holding up better than other sectors. Foreign markets are selling off as well. It looks like a bad end to the week for global stocks.
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Chart 1
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Chart 2
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Chart 3
VIX BOUNCES OFF 20 SUPPORT LEVEL... My Wednesday message showed the CBOE Volatility (VIX) Index nearing a test of potential support near 20 which included its July peak and "gap support" formed a month ago (see circle). A prior resistance level usually provides support on subsequent pullbacks. After dipping below the 20 level briefly yesterday afternoon, the VIX has rebounded back above that level. As I suggested on Wednesday, a VIX bounce off the 20 level isn't good for stocks. We'll be watching to see if that 20 support level holds.
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Chart 4
WE'LL TAKE ANOTHER LOOK AT THE MARKETS OVER THE WEEKEND...
