How Low Will Stocks Go?

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This year’s Black Friday was marked by selling, not buying, as overseas markets fell in overnight trading on Friday, with Japan’s Nikkei and Hong Kong’s Hang Seng down more than 2.5%. Spider Trust (SPY)
Spy
, which tracks the S&P 500, opened down 1.4%, which in turn triggered even more selling in European markets, with Germany’s DAX down 4.1%.

Trading volumes are generally low in the US in the days before and after Thanksgiving, which can increase price volatility. Friday’s volume in the SPY was the highest of the month and 60% above the 30-day average.

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The Dow Jones Industrial Average was down only 2.53% 3third Black Friday’s worst performance On record, it was only behind November 28, 1919 (down 3.56 percent) and November 27, 1931 (down 2.76 percent). For comparison, the Dow dropped 1.48% on November 27, 2009, following a bear market low in 2009 from the 2007-08 financial crisis.

The iShares Russell 2000 was the hardest hit last week, falling 4.2% and back in the yearly trading range. The Nasdaq 100 Index and the SPDR Gold Trust were the next weakest, as each lost 3.3% for the week.

The S&P 500 was down 2.2%, slightly worse than a 2% decline in the Dow Jones Industrial Average, while the Dow Jones Utility Average was down 0.8%. Selling was very heavy on Friday, with only 469 points moving up and 2857 falling for the day.

Even though stop-loss selling in a thin market contributed greatly to the extent of Friday’s decline, there was a fair amount of technical damage. The weekly Nasdaq 100 and S&P 500 advance/decline lines are both still positive, but last week was marked by a decline in the daily A/D lines across all major averages.

Invesco QQQ Trust (QQQ)
QQQ
, which tracks the Nasdaq 100, made a new high on Monday at $408.71 before closing lower and forming a major reversal (point A). A major reversal is formed when a market opens above an earlier high and then closes below the previous period’s low. They correspond to a loss of upward momentum, but not necessarily a major drop.

The QQQ remained above the 20-day exponential moving average (EMA) for most of Tuesday and Wednesday, before news of a new version of COVID-19 hit the market before Friday’s open. 38.2% Fibonacci Retracement Support is at $386.41, while the September high of $382.71 (line B) is down 2.2% from last week’s close. There is chart support at $380 and 50% support at $379.52 which I think is the most likely downside target.

daily nasdaq 100 advance/decline line Closed below its weighted moving average (WMA), which has now started to flatten. A fall in WMA would suggest a deeper correction. Converging support is well below current levels (lines C and D), moving back to early September highs. The strength or weakness of the A/D numbers on the first strong rebound rally will tell us more. Last week QQQ volume was similar to SPY, higher than the previous week.

The Spider Trust (SPY) triggered a weekly doji sell signal last week, closing below the previous week’s low of $466.23. The SPY had a Monday high of $473.54 and moved closer to the daily Stark+ band before closing below the daily Star-band on Friday.

38.2% support is located at $455.52 and slightly lower at $454.05 (Line A) from September high. The 50% support is at $449.95 and the 20-week EMA (not shown) is at $447.78. This EMA was tested for several weeks in September before the SPY bottomed out. The 61.8% Fibonacci support is located at $444.38, but I think there is a possibility of a further downside correction near the 50% support at the $448-$450 area. A drop to $448 at $459.39 with Friday’s close would mean a 2.5% drop. There is major support in the $429 area (Line B), which is down 9.7% from Friday’s close.

The daily S&P 500 A/D line returned to its WMA on Wednesday before sinking Friday, when only 14% of stocks closed higher. The A/D line has broken below the September high (line c) and is close to support since the beginning of October (line d). More important is the A/D support (Line E) based on the July high, August low and September-October trading range. NS On Balance Volume (OBV) Closed barely above its WMA on Friday, and well above support since early October (line f).

With these losses in key averages, it should come as no surprise that losses were more than 3% in three of the eleven S&P sectors, which led to a 3.5% decline in Consumer Discretionary Selection (XLY).
XLY
And this is followed by communication services (XLC) down by 3.2% and 3.1%.
xlc
and Technology Sector (XLK)
XLK
, Even though Energy Select (XLE)
XLE
Was down 4% on Friday it was still up 1.7% for the week.

For the week, the S&P Growth Index ($IGX) was down 3.1% while the S&P Value Index ($IVX) was up 1.1%, reversing the previous week’s gains. The technical outlook has not changed yet, however, the $IGX/$IVX ratio still favors growth.

The decline in some individual stocks was more severe on Friday, particularly in some so-called “reopening” stocks. The above four stocks were some of the weakest S&P 500 stocks, with Royal Caribbean down 13.2%
RCL
(RCL) and Norwegian Cruises fell 11.4%
NCLH
(NCLH). Many airline stocks were also under pressure from American Airlines.
came
(AAL) was down 8.8%, while live entertainment company Live Nation (LYV) was down 9.1%.

So what’s next for the stock market?

The stock is likely to fluctuate with volatility over the next few weeks. It may take time for the market to come down after last week’s selloff, but it cannot be ruled out unless I rely on the V-shaped bottom.

In the first quarter of 2022, I expect stocks to be well above closing levels since last Friday, but some stocks will outperform others between now and then. In evaluating new positions, I will focus on stocks and ETFs that outperform the S&P 500. As for retirement funds, I would stick with the stock market until there are signs that we have entered a bear market. Last week’s action could raise growing suspicions of Wall Street strategists.

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