US stocks look to recover after worst day of the year

Summary:

• US markets edge higher ahead of cash session

• Monday was the largest single day drop of 2019

• S&P500 up 80 points from o/n low of 2775

The week started with a bang for stock markets with large declines seen around the globe. The S&P500 ended down by more than 3% for its largest drop of the year while the DJIA tumbled by almost 800 points in what was the 6th largest drop on record in terms of points. While the largest drop ever sounds dramatic, this is due in no small part to the large nominal value of the index, with the drop in percentage terms not even in the top 400. 

The seeds for the declines were sowed last week when the Fed delivered a less dovish message than investors had hoped for and Trump announced additional tariffs on China, but the straw that broke the camel’s back was a sharp drop in the Chinese Yuan, with the currency falling to its lowest level in a decade against the US dollar. What is also worth noting is the breadth of the selling, with only 11 stocks in the S&P500 ending the day higher, the lowest number since Christmas eve 2018!

Less than a dozen stocks in the S&P500 managed to post a gain yesterday - the lowest level of the year!. Source: StockCharts.com 

While the reasons for the declines are well versed and still remain in place, there is a case to be made that the selling has been a little overdone. Such extremes as those seen above can often cause a reversion to the mean in the short term and it would not be too surprising to see a bounce today. Longer term, there’s been some technical damage done but the prior swing lows which coincide with the 38.2-41.4% Fib (2734-2757) retracement remain in place. This could be seen as a key line in the sand to watch going forward while resistance may be found around the 23.6% Fib which is not far from the daily highs at 2864. 

The 38.2-41.4% Fib region from 2734-2757 could be seen as key support going forward. Source: xStation