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Global stock indices bounce

By David Morrison  |  25/10/2018 15:06

Equities rallied going into Thursday’s European close. But investors still worry that the selling could suddenly resume

Wednesday saw steep falls across global equity markets. Last night the S&P 500 ended the session 3% lower while the tech-heavy NASDAQ 100 lost close to 4.5%. The Dow Jones Industrial Average fell over 600 points or 2.4%.

Technical breaks

These moves meant that the major US stock indices broke and closed below some key technical levels. The S&P sliced below support around 2,700. The NASDAQ 100 went into ‘correction territory’. As of last night’s close, it has lost more than 10% from its peak earlier this month. The Russell 2000 is down 15% over the same period while the Dow smashed below support around 25,000.

200-day moving averages

In addition, all these major US indices remain well below their respective 200-day moving averages (DMA). For the S&P, this has been the case for the best part of a week now, while the Russell has closed below its own 200-DMA in every session since 8th October. By way of comparison, back in early February, the US majors only dipped below their respective 200 DMAs on an intra-day basis rather than a closing basis. And focusing on the tech sector, the biggest driver of the stock market rally, the NASDAQ 100 has had several closes below its 200-DMA this month, marking the first closing break since June 2016.

What next?

Markets never go up, or down, in a straight line. Given the big percentage moves we’re currently seeing, the one thing we can be certain of is further volatility ahead. But focusing on the S&P, the bulls are really looking for a quick recovery and for the index to close back above 2,700. This will still leave it a long way south of its 200-DMA, but at least it will reverse most of Wednesday’s damage and keep hopes alive for a bigger recovery. Considering today’s price action that’s certainly a possibility. But there’s also a danger that today’s rally gets sold in to as bears look to take advantage of rallies. Most important, however, will be how the major indices close on Friday. If there’s a widespread ‘risk-off’ move going into the weekend, that could be the harbinger of more selling to come.
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