“Black Monday” debrief: Where do US stocks stand now?

<p>In what’s been dubbed “Black Monday” yesterday, US stocks collapsed across the board, with the widely-watched Dow Jones Industrial Average (DJIA) of 30 massive US […]</p>

In what’s been dubbed “Black Monday” yesterday, US stocks collapsed across the board, with the widely-watched Dow Jones Industrial Average (DJIA) of 30 massive US companies falling by over 1,000 points early in the session. Stocks did bounce from those panic lows, but the DJIA still closed the day down nearly 600 points, garnering top story treatment on the evening news across the US (and a bunch of panicked calls from my non-financially-inclined friends and family members).

After the selloff spilled back over into Asian markets, the People’s Bank of China (PBOC) decided to put its foot down and took action to try to stem the decline. The central bank cut interest rates for the fifth time in the last nine months, dropping the 1-year deposit and lending rates by 25bps to 1.75% and 4.6% respectively. The PBOC also cut its reserve requirement ratio (RRR), or the proportion of deposits that large Chinese banks must hold to protect against credit losses, by 0.5% to 18%.

The immediate economic impact of these moves is likely to be limited, but at least they show that global policymakers are concerned with the recent volatility and willing to step in. On that note, it’s worth noting that the PBOC had previously preferred to act over the weekend, when businesses and traders would have time to digest the move before the start of a new week; today’s midweek move may therefore carry more weight and help reassure jittery traders.

…So what’s next for US stocks?

As of writing, the PBOC’s actions appears to have stabilized sentiment in equity markets. Most European markets closed higher by about 4% on the day, while US markets are trading up by 2-3% in afternoon trade. That said, Monday’s big drop did plenty of technical and psychological damage, so it’s important to take a step back and evaluate where we stand now.

Looking at the S&P 500, US-domiciled equities have regained the 1900 level, but still remain nearly 10% off the all-time highs above 2130, a level we tested just five weeks ago. The market consolidated in an extremely tight 1975-2140 range for the last 10 months, so there is plenty of overhead supply that could cap any near-term rallies. In other words, any traders who bought the S&P 500 in the last 10 months and is still holding are underwater on their position; as a result, they may be anxious to sell on any rallies back toward the previous consolidation zone.

For its part, the RSI indicator remains in oversold territory, so today’s bounce could easily extend further this week. Nonetheless, the damage has been done and the medium-term bias will remain bearish as long as the S&P 500 remains below the previous-support-turned-resistance levels at 1975 and 2040. Only a break back above 2040 would start to alleviate the deep psychological scars that traders have suffered over the last week.

SP5008-25-2015 1-25-55 PMSource: City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.