The Nasdaq Composite ^IXIC on Monday morning tested its 200-week simple moving average at 6,981.7, then stabilized. The S&P 500 ^GSPC ended last week below its 200-week simple moving average at 2,642.2.
I view the 200-week simple moving average as the technical reversion to the mean for any ticker, including the major equity averages.
The Nasdaq was the last of the major averages to test this key level, which is the reason for stability off this morning’s lows.
The Nasdaq traded as low as 6,951.27 this morning and at that level was in bear-market territory 29.3% below its Feb. 19 all-time intraday high of 9,838.37.
The S&P 500 traded as low as 2,401.57 this morning, and was in bear-market territory 29.2% below its Feb. 19 all-time intraday high of 3,393.52.
On March 12 I wrote the column headlined “S&P 500 and Nasdaq Weekly Charts Show Significant Downside Risk.” Click this link to see the long-term weekly charts for the S&P and Nasdaq.
Today’s weekly charts drill down on these averages over the past two years to highlight the key levels to hold on weakness.
The Weekly Chart for the S&P 500
Courtesy of Refinitiv XENITH
The weekly chart for the S&P remains negative, with the index below its five-week modified moving average at 2,967.3.
It’s also below its 200-week simple moving average, or reversion to the mean, at 2,642.3.
The 12x3x3 weekly slow stochastic reading is projected to decline to 41.23 this week from 52.03 on March 13.
At its all-time high this index was above the 90 threshold putting the S&P in an inflating parabolic bubble formation.
This bubble has popped, with the S&P in bear-market territory. The key this week is realizing that the S&P is not oversold.
The horizontal lines at the top of the chart are its quarterly and semiannual risky levels at 3,103 and 3,303.4, respectively.
With the S&P below its 200-week SMA, the next key level to hold is its December 2018 low of 2,346.58.
The Weekly Chart for the Nasdaq
Coutesy of Refinitiv XENITH
The weekly chart for the Nasdaq is negative, with the index below its five-week modified moving average at 8,519.4.
It’s above its 200-week simple moving average, or reversion to the mean, at 6,981.7, which held this morning.
The 12x3x3 weekly slow stochastic reading is projected to decline to 41.6 this week from 52.61 on March 13. The Nasdaq is not oversold.
At its all-time high this index was above the 90 threshold putting the Nasdaq in an inflating parabolic bubble formation. This bubble popped, with the Nasdaq now in bear-market territory.
The horizontal lines at the top of the chart are its quarterly, semiannual and annual pivots at 8,860, 9,074 and 9,352, respectively. The Nasdaq was above these levels at its all-time high.
The chart clearly shows that the Nasdaq held its 200-week SMA. If there’s a gap below this reversion to the mean, the next key level to hold is its December 2018 low of 6,190.17.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.
Monthly levels for March were established based upon the February 28 closes.
New weekly levels are calculated after the end of each week.
New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.
A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.
A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.