What a week! Stocks really took it on the chin last week, but by Friday there was some semblance of stability. Several indicators are in deep oversold territory. At least a reflex rally is due.
During the carnage over the last couple of weeks, the Russell 2000 small cap index (1546.68) was the one to sustain the maximum damage. Last week, it collapsed 5.2 percent, and was down as much as 6.2 percent intraday Friday. In the process, a rising trend line from February 2016 has been lost (Chart 1). Also gone is major horizontal support at 1610-ish, not to mention 50- and 200-day moving averages. To add insult to injury, a potentially bearish MACD cross-under just developed on the monthly. Medium- to long-term, more downside pressure probably lies ahead. Near-term is another matter.
The amount of selling over the last two weeks has pushed several momentum indicators into deep oversold territory, particularly on a daily basis. Friday, the Russell 2000 was only up 0.1 percent, but produced a long-legged doji. Small-cap bulls are beginning to put their foot down.
Similar dynamics are in play on the Nasdaq 100 index (7157.21). Last week, it shed 3.3 percent. At its worst, it was down as much as 6.8 percent. Before last Friday’s 2.8-percent rally and recapturing of the 200-day, it lost several short-term horizontal support including 7300 as well as the 50-day. Amidst this tumult, last Friday produced a hammer reversal candle right on the 200-day. The index is also caught in a nine-month ascending channel (Chart 2). Two weeks ago, it was once again rejected at the upper bound, and last Friday it just about tagged the lower bound. The path of least resistance is a move higher toward the upper bound. Conditions are oversold and favorable for a move higher. Nearest resistance lies at 7300.
Over on the S&P 500 large cap index (2767.13), amidst the recent breakdown, there is a similar bull-bear tug of war around the 200-day. By Thursday, the average was handily lost, but Friday’s 1.4-percent bounce put the index right on the 200-day. Similarly, a rising trend line from February 2016 was lost earlier, but by Friday the damage was pretty much repaired (Chart 3).
