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The mega-cap indices ran into a brick wall on Monday and the rally that started late last week may be in jeopardy. This is very common after larger (5% or more) declines, but less so after the small drop we just encountered. It may suggest we will see some backing and filling or that the current pullback has yet to run its course. Or it could be a pause that refreshes and the rally continues from here.
The S&P 500 (SPY) retraced 61.8% of the decline from mid-September to early October, a common Fibonacci retracement level during rallies and pullbacks. In addition, the “500” ran into the declining 10-day simple average, the 13- and 21-day exponential averages (EMA), as well as overhead supply (prior buying) near the recent breakdown point. There is a gap between 2,911 and 2,919 that could be filled in the near term. If the index sees a break of the lower part of the gap, we may see at least a retest of the recent low at 2,856.
The Nasdaq Composite ran smack into it 13- and 34-day EMA’s Monday as well (chart resistance from the recent breakdown area). In addition, the Nasdaq bumped its head up against the declining 50-day average as well as trendline resistance off the peaks since September 19. Support for the index is the gap underneath that runs from 7,872 and 7,899. Below the gap, the recent low as well as the 200-day average sits between 7,700 and 7,727.
The Nasdaq 100 (QQQ) also retraced 61.8% of its recent decline before fading Monday afternoon. In addition, the QQQ’s found resistance from the 50-day average, which many times acts as support and resistance.
Walt Disney (DIS)
Disney is a global entertainment company that owns and leverages well-known brands, ranging from Mickey Mouse and Frozen to ESPN and ABC. Disney acquired the assets of 21st Century Fox in March 2019, and Hulu in May 2019. Disney derives 24% of its revenue from outside of North America and 12% of its revenue from Europe.
DIS broke out of a cup-with-handle back in April to all-time highs on huge volume. Since then, the shares have traded in a sideways consolidation between $127.50 and $147. Last week, DIS pulled back to the bottom of the range, almost hitting the rising 200-day average at $126.60. We are using a tight stop on this one: if the 200-day gives way, there is little support until the $117 area. The stock may be close to completing a 3-wave, ABC correction. At the recent low, DIS was very close to oversold territory on the daily chart.
Support sits near $125 and we would put a stop-loss just below that area. We would take profits in the $145 region if $140 is successfully hurdled.
Charles Schwab (SCHW)
Charles Schwab is a leading provider of financial services, with 12 million active brokerage accounts and $3.7 trillion in client assets as of 6/30/19. The company offers wealth management, securities brokerage, banking, money management and financial advisory services to individual investors and independent advisors.
SCHW is a risky, technical turnaround play as it has declined from $60 in May 2018 to a recent low of $35. Last week, the shares undercut their August lows on capitulatory volume. If SCHW can recapture the lows from August around $36, it would set up a false breakdown (which many times are bullish). Because of the most recent decline, which was very steep in nature, there is little resistance above. Some of the other discount brokers that got hit recently are showing initial signs of a potential counter-trend rally. According to Investors.com, SCHW has high EPS and Group Relative Strength ratings.
We would put a stop-loss just below support at $31. We would take profits at $40.
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