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Market Might Be Setting the Stage for a Bigger Crash

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Avoid the market trap

In the previous part of this series, we discussed why investors shouldn’t fall prey to a minor market bounce back and enter long positions. Investors should remember that market rallies often witness downside corrections followed by a rally extension. In similar fashion, the market sell-off could be followed by a minor bounce back before the sell-off intensifies. Let’s find out what technical indicators are suggesting and explore some key support and resistance levels.

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Technical outlook

As we suggested in Support Levels to Watch in the S&P 500 as the Sell-Off Continues, the S&P 500 Index (SPY) will likely test an immediate support level near 2,790–2,780. On October 10, SPY settled near 2,786. The 200-day simple moving average was hovering at 2,765, which could also act as a support level. The possibility of a minor bounce back from the 2,780–2,765 range can’t be ruled out completely because it’s an important support zone.

However, if we observe a momentum indicator like RSI (relative strength index), we can see severe weakness in the momentum. For the RSI, the 14-day setup was hovering within the “oversold” territory at 22.7. The weak momentum means that an extension of yesterday’s sell-off is possible.

A sustainable violation of the 2,780–2,765 support zone could attract renewed selling pressure in upcoming sessions. The next key support level in SPY can be seen near 2,670. On the upside, an immediate resistance level can be seen near 2,820.

For the Dow Jones Industrial Average (DIA), a key support level could be seen near 24,800. The NASDAQ Composite Index (QQQ) might find key support near 6,700.

Auto stocks could fall more

The broader market sell-off could continue to take a toll on auto stocks before their third-quarter earnings season. As of October 10, General Motors (GM), Ford (F), Fiat Chrysler (FCAU), and Tesla (TSLA) have already fallen 20.5%, 28.6%, 9.8%, and 17.5%, respectively.

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