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Stocks Are Free-Falling - Will This Area Act as Support?

Investors don't have it easy right now with the S&P 500 down more than 15% in just a few trading sessions. Here are some must-know levels to watch.

An unwind of this magnitude is breathtaking - and not in a good way. It has taken just seven trading sessions for the S&P 500 to fall 15.8% from peak to Friday’s current low.

We’ve seen the Dow Jones Industral Average drop at least 800 points in four of the last five trading sessions, with three of those declines topping 1,000 if we count the move to Friday’s low.

The CBOE Volatility Index (the VIX) went from sub-15 on Feb. 19 to a high of almost 50 less than 10 days later.

Like I said, the move here has been nothing short of breathtaking. Equity investors shrugged off coronavirus headlines, despite clear and obvious signs that the Chinese economy would see a serious slowdown as a result. With the virus now spreading more quickly around the world, market observers can add fear to the mix as well.

If it were a regular issue - say a liquidity problem or an economic hiccup - the Federal Reserve could step in with an emergency rate cut. The only problem is that this isn’t really an economic issue, it’s a health issue. Granted, it’s one that will have economic consequences, but not of the same caliber as “normal” disruptions.

What Do the Charts Say?

Daily chart of SPY.

Daily chart of SPY.

Taking a look at the SPDR S&P 500 ETF  (SPY) - Get Free Report on the daily chart above, it’s not hard to see how violent this move has been. Go on vacation for a week and your portfolio could have been seriously thrashed in this kind of action.

This is not common behavior and predicting what’s next is nearly impossible. Thursday’s action (circled in blue on the chart), highlights a decline that should have drawn in buyers, but failed to do so.

The SPY was down more than 10% from the highs at that point, and was coming into the 200-day moving average and the big fourth-quarter breakout spot near $300. Instead, we saw a weak midday bounce that was aggressively sold lower into the close, with the SPY closing at the dead lows, down 4.5%.

The decline has come on robust volume, as the SPY is certainly oversold. The question now becomes two-fold: when do we bounce and how long will the bounce last?

The fact that the market, not even for a day, couldn't hold up on a test of the 200-day moving average is concerning. We are seeing a modest stabilization on Friday, as Thursday’s action had a capitulation feel to it. Still, who’s willing to go long into the weekend here? 

Guessing bottoms is a painful gig. I'd rather wait for a low to materialize and then use that as my risk marker to trade against. 

On the downside, I want to see if this $280 to $285 area holds as support. This zone supported the SPY throughout August, and served as a quick support area in October, before the market’s multi-month breakout began.

On the upside, see what a rebound back up to the $300 mark and the 200-day moving average looks like. Should the SPY bounce to this mark and find it as resistance, a retest of whatever the lows end up being may be in store. If the SPY reclaims the 200-day moving average, a move up to the 100-day is possible.