On 09/18/20 the S&P 500 (SPX) broke below 3310.00 which was the second stop loss level for the SPX trade initiated 09/10/20 at SPX 3412.60. The first stop loss on half the position was at SPX 3327. 00 which resulted in a loss of 1.25%. The second stop loss level of 3310 was 3.0% below the entry point and resulted in a 1.5% loss on the second half of the position.
Almost all markets have seasonal patterns. The US stock market is seasonally bearish from late August until mid- October, so stocks could continue to fall for the next few weeks.
The decline from early September has so far not been uniform, please see the SPX 4-hour chart courtesy of Trading View.
Of the three main US stock indices; S&P 500, Dow Jones Industrial Average (DJI) and Nasdaq Composite (IXIC) the DJI has been the weakest. Since the recent rally began on March 23rd both the SPX and IXIC have made new all-time highs. The DJI made its rally high on September 3rd 1.2% below its all-time high.
The DJI September decline low occurred on September 10th at 27447. On September 11th with the SPX and IXIC making new decline lows the DJI bottom was 27448 just above it prior day low. On September 18th again the SPX and IXIC made new decline lows while the DJI low was 27488, 40 points above its September 11th bottom. If the September drop were the beginning of a much larger bear phase you would expect the weakest of the three main stock indices to be leading the way down.
The SPX 4-hour chart further illustrates the bears lack of power. The Russell 2000 index (RUT) is composed of small caps stocks. Since March 23rd it’s been much weaker than the three main US stock indices. At its rally high made on August 11th it was 6.5% below its all-time high, yet on September 18th it was holding well above its decline bottom made on September 11th. If this were the beginning of a bear market, small cap stocks would likely be significantly below the main indices.
Additional evidence of weakening downside momentum comes from the 4-hour RSI which as of September 18th had a double bullish divergence.
While its possible the decline could be complete as of September 18th , seasonal factors imply prices could go lower. The next significant Fibonacci support is at SPX 3258 which is a .236 retrace of the March to September rally. Just above that level is the short-term top made on July 23rd at 3280, this prior resistance point could become support.
If a bottom is in place as of September 18th bearish seasonal patterns could hold back a near term rally. Within the next few weeks there could be a move back to, but just above the bottom made on September 18th.
Evidence suggests the current decline is probably a correction within an ongoing bull trend. Long-term investors continue to hold all positions. Short-term traders hold off on any new positions long or short, let’s wait for additional evidence from the stock market. An update on market conditions will be posted soon.