Ready for a Wild Wednesday? Try the Tylenol 3s | August 26

This was NOT the type of “Turnaround Tuesday” investors were looking forward to.

Probably the 2 biggest questions investors are asking this morning are: Is this really August? and How can this only be Wednesday?  

No doubt we’ve had at least a week’s worth of action the last 2 days, capped by a stunning last 15 minutes of trading on Tuesday that was reminiscent of an old school triple witch/rebalancing close from the days of pre electronic everything and algo dominated order execution.  

Tuesday recap:  A blistering decline in the last 45 minutes of the day left traders heads spinning Tuesday afternoon as Market averages turned  +2% to +2½% gains from midday into 1%+ losses at the 4:00 PM close.  The morning rally seemed to be in good standing as investors were able to take advantage of prices they had not seen for 12 to 18 months.

The 8½% decline over the previous 3 days left equity markets primed for a reflex rally even before the move by the PBOC on rates and reserve requirements.

What went wrong?  One of the benefits of volatility, especially when combined with high volume is that it helps define new levels of support and resistance.  The rally Tuesday looked great on the screens into the early afternoon with market leaders from most of the year pushing the action. This was supported by very healthy market internals as advancing issues led decliners by greater than 4 to 1 at 1:00 PM.  By 4:00 PM the avd/decl was negative!!

The issue was, we never punched through Monday’s intraday highs which are now the markets first key s/t resistance.

stock market volatility continues

These new resistance levels of S&P 500, 1950; NASDAQ, 4700; and Russell 2000, 1140 held against at least 3 waves of strong buying during the first half of the day.   Until we get through those levels levels, and it will likely take a lot of volume to do so, we’re going to either trend sideways in an attempt to consolidate recent losses, or go lower, possibly sharply lower until we find the next solid level of support.

In terms of near term support levels, Monday mornings lows will get all the attention on further selling the remainder of the week.    The best estimate of those levels are:  DJIA, 16,400;  S&P 500, 1865 (note that we closed less than 3 points above that):  NASDAQ, 4400ish (opening level for indices are never an exact number);  Russell 2000, 1105 (news flash!! the Russell closed at 1104)

Since we’re talking support levels, we also need to look at the closing lows from the October 2014 sell off.  If you’ve been watching too much financial media you might be surprised that the S&P 500, NASDAQ, and Russell 2000 are still above those closing levels from Oct ‘14 of  S&P 500, 1862.50;  NASDAQ, 4215; and Russell 2000, 1049.30.

Where do the stock market go from here?  

First we have to talk China as it’s been one of the trigger points for much of the volatility the last 4 to 5 days.

Chinese stocks closed modestly lower Wednesday, following a seesaw session as the  Shanghai composite settled -1.3%, just below the benchmark 3000 level.  This will likely be viewed as a disappointing response to the PBOC cutting Interest Rates and lowering Reserve Requirements after the close of trading on Tuesday.   

Many had expected a reflex rally for the Shanghai market after a 15% decline the previous 2 days.   This will raise the stakes for the remainder of the trading day in Europe and opening of trading later this morning in New York.

The Jackson Hole conference of Global Central Bankers and Monetary Policy heavyweights starts tomorrow, and there will close attention paid to any comments on currency volatility, the implosion of emerging markets, and the recent downgrade of global stock market valuations.

The Early Line:  In early trading, US stock index futures are looking to wipe out the late losses from yesterday with the DJIA projected to gain ~200 points and the S&P 500 looking better by ~25 handles.  It will be fascinating to see the confidence level of investors toward these early gains given the debacle late Tuesday afternoon.

Oil shares in the service space may get a much need break from recent selling pressure in response to Schlumberger, SLB; buying Cameron, CAM; at a 50%+ premium in a cash and stock deal.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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