Stock Market Breakdown Or Re-Test Into November 3 Elections?

If we are just seeing a re-test of the September lows on the S&P 500 Index INDEXSP: .INX, I would expect stock market breadth and momentum to remain relatively strong while seeing a more complete unwind in optimism than what was experienced last month.

If the weakness of the past two weeks is a warning shot across the bow and in advance of a more protracted period of selling, we are likely to see the opposite – optimism remaining resilient with market breadth & momentum experiencing significant deterioration.

The intensity of this week’s stock market selloff (two days of downside volume out pacing upside volume by 10:1 on the NYSE) is more consistent with the deterioration than re-test scenario. Sector-level trends have also been less-than-resilient.

As the S&P 500 has moved into the vicinity of its September low, the re-test scenario would gain credence if momentum and the percentage of stocks above their 50-day and 200-day averages can hold above their respective September lows. Not seeing a further expansion in the new low list would also be important. At the index-level, recent relative strength from the S&P 500 Equal-Weight index and the Broker/Dealer index is encouraging. The breakdown in the German DAX, which is at its lowest level since May, is not.

Sign up for our FREE newsletter
and receive our best trading ideas and research



The Bottom Line: The September low for the S&P 500 Index near 3225 appears to be important. If optimism unwinds and the market holds that level, prospects for a year-end rally remain good. Breaking that level would introduce a lower low after a lower high and (especially of breadth continues to deteriorate) would make the prospects for a strong year-end rally a bit more challenging.

s&p 500 index price correlation stocks above 200 day moving average breadth investing chart image
s&p 500 index price correlation to stock market breadth indicator investing research chart image

Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.