Value Investors Key to Stopping Stock Market Slide

Although U.S. stock indexes are trading lower for the week, the sell-off has been orderly and without much fanfare. This may be a sign that we’re closer to a bottom than the headlines lead you to believe. I can build a case for a strong recovery in the stock market if this current pullback attracts new buyers in key support zones. In other words, I’d like to see new higher bottoms form. This will tell me that buyers have returned.
James Hyerczyk
U.S. Equity Markets
U.S. Equity Markets

Ahead of Friday’s U.S. Non-Farm Payrolls report, the new Democratic-held U.S. House of Representatives passed legislation Thursday night that would end a partial government shutdown. However, this does not mean the passage of the spending packages will move Congress closer to reopening nine unfunded federal departments at this time. Since the new measures do not include money for President Donald Trump’s proposed border wall, the new bills are not going to be signed into law.

Nonetheless, U.S. stock market investors seem to like the new developments. In the overnight futures markets, the benchmark March E-mini S&P 500 Index is trading 2464.75, up 17.00 or +0.69%. The blue chip March E-mini Dow Jones Industrial Average is at 22805, up 146 or +0.64% and the technology-based March E-mini NASDAQ-100 index is at 6217.75, up 55.75 or +0.88%.

The markets are recovering nicely in the pre-market session after lower guidance from Apple cast a pall on Thursday. Despite the early strength, the Apple news may limit gains. Another piece of positive news that could be underpinning the U.S. markets is the announcement of the January 7-8 higher-level trade talks between the U.S. and China. This news is helping to underpin China’s Shanghai Index, and this strength may be carrying over to the U.S. trade. It is certainly something to pay attention to early today especially if this optimism spreads to Europe.

Pay Attention to Potential Bottoming Action

Although U.S. stock indexes are trading lower for the week, the sell-off has been orderly and without much fanfare. This may be a sign that we’re closer to a bottom than the headlines lead you to believe.

All three major indexes posted potentially bullish closing price reversal bottoms on December 26. This chart pattern typically signals that the buying is greater than the selling at current price levels. Furthermore, the Dow produced its biggest gain in history.

The subsequent follow-through to the upside combined with the reversal may have taken a lot of the weaker shorts out of the market. Since investors don’t typically like to chase the market higher unless there is a bona fide bull market, they’re likely to look to buy on a normal pullback into a value zone.

I can build a case for a strong recovery in the stock market if this current pullback attracts new buyers in key support zones. In other words, I’d like to see new higher bottoms form. This will tell me that buyers have returned.

For the March E-mini S&P 500 Index, the key area that must hold as support is 2419.75 to 2395.50.

The key support zone for the March E-mini Dow Jones Industrial Average is 22435 to 22151/

The value zone for the March E-mini NASDAQ-100 Index is 6114.75 to 6045.50.

Build Secondary Higher Bottom, and Trend Change is Next

If investors can succeed in building secondary higher bottoms then this could create the upside momentum needed to challenge the most recent tops. Taking out 2523.00 will change the trend to up for the E-mini S&P 500 Index. A trade through 23417 will change the E-mini Dow trend to up. The E-mini NASDAQ-100’s index will change to up on a trade through 6409.25.

This chart pattern tends to work when the volume is above average so be prepared next week when the major players return from their extended holidays.

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