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S&P 500 Reverses After It Tests This Indicator; Will Apple Form A New Base? | Stock News & Stock Market Analysis

Stocks were still poised to cap a big weekly decline but bargain hunters stepped in during a late-afternoon rebound amid a sharp slide in crude oil prices and not much change in long-term interest rates. However, it’s still too early to declare the correction over.

X At 3:45 p.m. ET, major indexes accelerated their rebound, rising 1.5% to 1.7% after plunging nearly 2% earlier in the session.

The S&P 500, rebounding from a loss of as much as 1.8%, fought its way back to hop above the breakeven level around 2 p.m. ET and rally as much as 1.8% higher. But the 500 is still on track to post one of its worst weekly declines (down more than 5%) over the past two decades.

At one point on Friday, the Nasdaq composite fell as much as 8.4% for the week, bigger than the nearly 8% slide seen during the “Flash Crash” week ended on May 7, 2010, and an 8.1% walloping during the week ended Aug. 5, 2011.

The S&P 500, meanwhile, is probing longer-term support at the 200-day moving average, which it undercut on Friday for the first time since the Brexit shock of late June in 2016.

After that swift decline back then, the S&P 500 staged a rare Day 3 follow-through on June 30, 2016, confirming a potential new uptrend was in place. That market-timing signal indeed proved that stocks were ready to rumble higher.

Please check out this Investor’s Corner to learn more about how a follow-through is a research-driven, time-proven indicator of major market bottoms. In a few rare cases, a new uptrend may take place before a typical follow-through triggers, as seen in November 2016, just ahead of the historic U.S. elections.

The S&P SmallCap 600 rallied 0.7% after sinking 1.6% earlier in the session. At 899, the 600 is still eyeing a weekly decline of nearly 4.8%, yet as a daily chart on MarketSmith shows, the index is showing a nice undercut of and rally back above the key 200-day moving average.

In general, a healthy stock market uptrend shows the major indexes rising above both their 50- and 200-day moving averages. The slope of both moving averages should also be up.

The strength of the rebound by the 500 suggests that short covering, algorithmic buying triggered by the S&P 500’s touch of the 200-day moving average, and old fashioned bargain hunting all helped improve the mood on Wall Street. Plus, one has to consider that margin debt growth hasn’t really increased at a rate seen in prior major market tops. See IBD’s graph on this sentiment indicator by going to the Psychological Market Indicators section on Investors.com.

Meanwhile, Apple (AAPL) is losing support at the long-term 200-day moving average with a more than 1% drop to 153.29, sinking nearly 16% below its all-time peak of 180.10. Such a decline now exceeds the maximum correction allowed for a flat base and sets the stock up for a potential new base including the cup with handle or the double bottom.

Apple has given back all the gains from a Sept. 27 breakout past a second-stage cup with handle at 160.97. However, gains from the Jan. 6, 2017, breakout from a first-stage bottoming base pattern are still hefty at 30.7%. That bottoming base was an excellent cup with handle that provided a 118.12 entry point, 10 cents above the handle’s intraday high.

Other stocks that show relative strength but have fallen back below their latest buy points may produce the base on base, another bullish chart pattern that often precedes big breakouts and price runs in a healthy bull market.

Yet for now, the market appears it will need some time before it confirms a new uptrend after Wall Street gets a sense of how fast U.S. interest rates could rise this year.

The Federal Reserve pushed the fed funds rate by a quarter point to a target range of 1.25%-1.5% in December, still a low level compared with prior decades. Bond futures traders expect the U.S. central bank to raise short-term interest rates at least three more times in 2018, targeting 2%-2.25% by December.

As many as 12 of the 30 components in the Dow had lost 2 points or more. Buying in defensive sectors had earlier helped blunt the S&P 500’s decline.

Some leading tech names also are holding up well. Nvidia (NVDA), the top chip technology firm in advanced processors for datacenter, self-driving cars and video game consoles, also traded wildly but still rose more than 5% to 230.16 in volume running nearly triple usual levels.

The Santa Clara, Calif., firm late Thursday posted exceptional increases in the top and bottom lines again as earnings grew 59% to $1.57 a share and revenue lifted 34% to $2.91 billion, a quarterly best.

Those increases came on top of a 183% leap in adjusted earnings and a 55% rise in revenue in the year-ago quarter.

Nvidia also is an emerging force in products related to artificial intelligence and Bitcoin mining.

On Jan. 8, the stock broke out of an eight-week cup base with a 218.77 buy point. Nvidia tested the buy point with a sharp decline on Monday, but it found institutional buying support at the 50-day moving average (painted in red on IBD daily charts). At 5% above the proper entry, Nvidia is slightly out of buy range.

The large-cap fabless semiconductor play sports a 95 Relative Price Strength Rating on a scale of 1 to 99, as seen in IBD Stock Checkup, and an excellent Composite Rating of 97. A 95 RS Rating means Nvidia has outperformed 95% of all public companies in IBD’s database over the past 12 months.

Elsewhere, the Dow Jones utility average rebounded 0.8%. WTI crude oil futures dipped below the $60 level for the first time in 2018, falling as much as 5% to $58.07 a barrel. WTI futures have now fallen as much as 12% below its year-to-date peak of $66.14.

The yield on the benchmark U.S. 10-year Treasury bond stayed relatively flat at 2.82%, 77 basis points above the 2-year note yield of 2.05% and 117 basis points above 3-month Treasury bills. But Tradeweb noted that the U.S. yield curve has begun to get steeper at both the front and back ends.

A steepening curve is good news for banks that derive much interest-related income.

Banks are also rebounding, and a fistful of names have not fallen as much as the major indexes.

JPMorgan Chase (JPM), a member of the 30-stock Dow industrial average, has reversed from a drop of more than 1% to a 2.3% rise to 110.42. Volume is running more than 50% above its 50-day average, a good sign of healthy institutional buying.

The money center bank has been testing the 50-day moving average the entire week. Shares lie 8% below the all-time peak of 117.35, while the S&P 500 is 11% below its peak of 2872.

JPMorgan analysts reportedly expect eight rate hikes by the end of 2019.

Morgan Stanley (MS) has dropped further below the 50-day line with a more than 3% slide to just above 50, but it too has turned higher for a minor gain. The asset manager and investment banking giant had come just within 2 points from testing its longer-term 200-day moving average.

The veteran Wall Street firm has posted solid EPS increases of 14% to 135% over the past six quarters as revenue grew 11% to 27%. The Street sees Q1 profit jumping 23% to $1.23 a share, which is impressive given that in the year-ago quarter, profit soared 82% to $1.00 a share.

Not all of the top industry groups in the market came from defensive sectors. In fact, fabless semiconductor, leisure products, superregional bank, security software, shoe maker, automobile retail and internet content firms all rallied 1.5% or more in late-afternoon trading.

(Please follow Saito-Chung on Twitter at @IBD_DChung for additional commentary on growth stocks, breakouts, and financial markets.)

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