Active Selling Leads To Gap Downs

October 28, 2020

Media sources blamed increasing Covid19 cases for today's selling but this is hardly news. Up to now, the selling has been consistent but today saw things accelerate to the downside which left difficult breakdown gaps behind. What this means in broader terms is of instead of looking at a rally continuation we need to look at a broader consolidation.

The Nasdaq is on course to testing the September low but the gap now establishes a break to prior action. In real terms, today's action is not as damaging as headlines might suggest, but we are looking at a shift to a sideways consolidation. Even with that, there is a long way to go before long term support of the 200-day MA is tested - but it's not a buyers market.

The S&P took a significant hit and will be first to test the September low, given what happened today it would seem unlikely the low is going to hold at support and the 200-day MA is not far away either. Selling volume accelerated in confirmed distribution. If we are going to see a broader reversal in markets, the S&P will be the one to lead lower.

The nascent bullish consolidation in the Russell 2000 was undone by today's gap down. There were damaging sell triggers for the MACD, On-Balance-Volume and ADX. The Russell 2000 is still managing to cling on to a relative performance advantage against the S&P and Nasdaq, but prior action has now morphed into a broader trend higher and things are now a little more messy.

Going forward, things are unlikely to resolve before the election - and perhaps for the rest of the year. Whatever bullishness was in the market (at least in the Russell 2000) has now dissipated into a general status quo. I had commented back in early September that a level of caution was advised. If the September low is undercut then a major downtrend is likely to emerge. In such a scenario, we will need to see markets extend well below their 200-day MAs before we can start looking for the next buy-worthy low.

There is one caveat, when the Covid low was hit in March and markets had hit extreme lows I had recommend for investors to ignore headlines and to plan for an extended period of dollar-cost-average buying. This remains true today, and investors should not be trying to time the market by waiting. March lows were the trigger to get busy in the market and should another sell off emerge then this buying will allow you net more shares for your money.

You've now read my opinion, next read Douglas' blog.

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