More selling likely with U.S. stock indexes below key levels

[October 15, 2014]  By Yasmeen Abutaleb

(Reuters) - Wall Street has been hit with a wave of selling in recent days, with the S&P 500 registering its worst three-day slide since 2011, but despite a burst of buying on Tuesday, investors expect that more selling is in order before the market correction ends.

On Monday, the benchmark S&P 500 closed below its 200-day moving average, an important measure of the longer-term trend in the equity market, for the first time since Nov. 16, 2012.

Equities started to rebound on Tuesday, but buying dried up in late trading, leaving stocks with a gain of just 0.16 percent. Strategists at Bank of America-Merrill Lynch said the weakness is likely "corrective and temporary," but they're not looking for the S&P to find a floor until around 1,814, which would represent a fall of nearly 10 percent from its closing peak.

The Dow Jones industrial average and Nasdaq Composite have also fallen below support levels, while the Russell 2000 has entered correction territory, defined as a decline of more than 10 percent from the most recent high.

"This is the most back-and-forth activity we've seen since 2011," said Frank Cappelleri, technical market analyst and trader at Instinet LLC. "We shouldn't discount the chance of volatility sticking around for a while."

Technicians look at different kinds of levels - moving averages, retracement levels - as a way of gauging triggers for buying or selling. In the case of sharp selloffs, these levels are breached quickly - changing what have been support areas into resistance areas.

Mike O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut, in a comment Tuesday described Wall Street now as "truly a technical environment," and said that some managers will "try to outperform by limiting, removing or eliminating exposure to a declining tape." He cited support levels on the S&P at 1,865 to 1,875, and after that at around 1,848 - the last marking the level that would put the S&P down on the year.

The swiftness of October's selloff has brought the S&P 500 through its 200-day moving average for the first time in two years. Strategists at BofA-Merrill put it simply: "U.S. equities are falling like dominoes."

They note that the Nasdaq 100, which is composed of the largest stocks in the Nasdaq Composite, is probably the next to watch for, noting that it has yet to break through a zone between 3,774 and 3,762. It closed at 3,810 on Tuesday.

Some strategists are also watching the VIX futures, at a time when the spot VIX is trading higher than the nearest three months of futures contracts. That inversion is not the norm, and it suggests that more people are worried about near-term volatility than long-run ups and downs. The spot VIX closed on Tuesday at 22.79.

Following are technical indicators that show the current condition of the major U.S. indexes. "Relative strength" is a technical indicator that identifies possible shifts in momentum of an index:

DOW INDUSTRIALS

Decline from closing high through Tuesday: 5.6 percent

Below 200-day moving average? Yes - 265 points below

Relative Strength Index: 44, suggesting the market is neutral

Percentage of stocks below 200-day moving average: 43.3 percent, according to Interactive Brokers LLC

Support Level: 16,015, according to Cappelleri

S&P 500

Decline from closing high through Tuesday: 6.7 percent

Below 200-day moving average? Yes - 28 points below

Relative Strength Index: 40, near neutral
 

Percentage of stocks below 200-day moving average: 58.6 percent, according to Interactive Brokers LLC

Support Level: About 1,850

NASDAQ COMPOSITE

Decline from 2014 high through Tuesday: 8.1 percent

Below 200-day moving average? Yes - 73 points below

Relative Strength Index: 40, near neutral

Percentage of stocks below 200-day moving average: 72.1 percent, according to Interactive Brokers LLC

Support Level: Near 4,200

RUSSELL 2000:

Decline from closing high through Tuesday: 12.2 percent

Below 200-day moving average? Yes - 87 points below

Relative Strength Index: 35, near oversold levels, meaning there could be a rebound
 

Percentage of stocks below 200-day moving average: 72.7 percent, according to Interactive Brokers LLC

Support Level: About 1,037

(Reporting by Yasmeen Abutaleb; additional reporting by Rodrigo Campos; Editing by Leslie Adler)

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