Amidst Last Week’s Bloodbath, Bulls Defend Crucial Support On Major US Equity Indices Friday

Last week, all major US equity indices lost north of 10 percent and were down a lot more at session lows Friday.  If there is any consolation in this, amidst the carnage, bulls stepped up to defend important support.  Some metrics are near washout levels.

Last week was a vivid example of what happens when things get too lopsided.  From late December 2018 through the all-time high of 3393.52 on February 19, the S&P 500 large cap index jumped north of 42 percent.  That is in 14 months!  Most recently, since early October last year, the index rallied nearly 17 percent! 

The pace was clearly unsustainable, but sellers were on strike and dips were getting bought – until last week.  In the end, the S&P 500 (SPX) lost in seven sessions what it took five months to build.  Friday’s intraday low of 2855.84 essentially matched 2855.94 from October 3 last year (Chart 1).  On the way to completing a round trip, the index hurriedly lost both the 50- and 200-day moving averages. 

If there is any consolation for bulls, it is that bids showed up at the October low.  In fact, 2800-plus has proven to be an important price point going back to January 2018.  Thus far, it has held.  By the close, the S&P 500 rallied nearly 100 points off Friday’s intraday low, with a potentially bullish hammer reversal.

This is also true with the Russell 2000 small cap index.

First of all, small-caps have lagged large-caps for a while now.  Longs are essentially hiding in the big names.  A ratio between the Russell 2000 (IWM) and the S&P 500 peaked in June 2018, just before the former peaked, which occurred in August that year at 1742.09.  The closest the Russell 2000 came in testing that high was on January 17 when it tagged 1715.08 (Chart 2).  On the way to that high, the index broke out of 1600-plus, which worked as support/resistance going back to January 2018.  In last week’s bloodbath, bulls again lost that level. 

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