Stock market: Traders glued tokey level on charts

A
trader looks up at charts on his screen just before the end of
trading for the day on the floor of the New York Stock Exchange,
November 18, 2013.
Lucas
Jackson/Reuters

• US stock markets on Wednesday faced their worst
  sell-off since February.
• Traders are paying close attention to key technical
  levels, and right now the 200-day moving average is in
  focus.
• The S&P 500’s 200-day moving average has been
  tested three times this year, and has so far managed to
  hold.
• The Nasdaq has already plunged below the technical
  level for first time since June 2016.

US stock markets witnessed their heaviest
selling
 since February on Wednesday, with all
of the major averages tumbling to their lowest levels in three
months.

Amid the recent selling, t
he Cboe Volatility Index, which measures
market volatility and is commonly referred to as its
“fear gauge,” has more than doubled in the past week. It jumped
another 6% early Thursday as fears of a major market correction
remain at the forefront of investors’ minds.

And one place investors are paying close attention to for
clues to if this sell-off has further room to go is the 200-day
moving average, a key technical level. Simply put, the 200-day is
an indicator traders use to determine the overall
trend of the market. The market is in an uptrend as long as it’s
above its 200-day, and it’s in a downtrend if it’s below the
measure.

“The S&P 500 is testing the 200 day moving average,”
said Hussein Sayed, chief market strategist at FXTM, an
online forex trading broker. 

“This key support level has been tested three times in 2018
and managed to bounce again higher. However, a close below for
two or three days may intensify the selloff for a couple of more
days.”

Business
Insider, Andy Kiersz/Data from Bloomberg

So what happens if the market falls below the 200-day moving
average and stays there? We can look to the last time
that happened — from August 2015 to February 2016 — for some
clues.

In August 2015, the US stock market suffered a shock amid
the fallout from
Greece’s default on an IMF loan payment and
China’s “Black Monday”, the day the country’s
benchmark Shanghai Composite index fell more than 8%.

The S&P 500 quickly tumbled into a correction, down more than
10% from its recent high, after sliding below its 200-day moving
average. Shares would make back nearly all of their losses before
taking out those lows a few months later. The drop extended to a
total of more than 15% by February. The benchmark index wouldn’t
make a new high until June, just after the
UK’s Brexit
vote.

Before that, the previous time the S&P 500 spent an
extended period of time below its 200-day was during the summer
of 2011, when it plunged into a brief bear market following the
US
losing its “AAA” rating at the ratings agency Standard
& Poors. It wouldn’t make new highs until February
2012.

“I will start paying attention when the S&P hits its
200 day moving average,” Brad McMillan, chief investment officer
for Commonwealth Financial Network, said in a note sent out to
clients on Wednesday. 
“I won’t worry then, just
start paying attention.  Until then, this is very likely
admitted loud noise.” 

He better start paying attention. 

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