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What happens in the overnight futures markets doesn't necessarily stay in the overnight futures market.
The action in stock futures was wild last week, just as crazy if not more so than the volatile swings in stocks during normal trading hours. But it was the futures market, that first signaled where the stock market selloff would stop—at least temporarily.
S&P 500 futures traded in a swift swoosh down to the 200-day moving average just after 11 p.m. ET Monday evening, after the S& P 500 cash market fell 4.1 percent during the trading day. But it recovered from that low until Friday, when it and the cash market tested that level together in an afternoon plunge. Futures got to 2,529 Monday night, and 2,530 on Friday afternoon. The S&P 500 tested a low of 2532 just below the 200-day moving average, which was at 2,539.
"We're saying it's a buyable pull back. We're in the process of bottoming," said Ari Wald, technical analyst at Oppenheimer. "It's a positive signal to us when the market hits the 200-day moving average again, tested it, inflected there and held."
Traders are hyper-focused on the moving averages in this sell off, both because they see no fundamental reason for the sell off and because so many computer generated trades are tied to them. Closely watched by technical analysts, a moving average is the average price of a stock or commodity over a set period of time that can be days, or even years. As a so-called moving average, it reflects the latest day as the last price and continually drops the first day in the period.
In last week's sell off, the S&P's break through its 50-day moving average generated a big market sell off when it failed to hold. Then it broke its 100-day, but on Friday, the 200-day held and the market bounced.
"It certainly establishes the lows that were put in place Friday by the cash market, and the retest of lows by the S&P eminis [futures]," said Robert Sluymer, technical analyst with Fundstrat.
Some strategists don't believe a true bottom will be put in until the cash market tests the lows, but that may not happen.
"Technicals don't matter until you get into periods of stress when normal analysis just doesn't explain the day to day levels," said Sluymer, who believes the bottom is in and it's been confirmed by the action on Friday.
"We are back above the 100-day but more or less oscillating around that 100-day," said Wald. That retest will be successful when the index closes above 2,640, he said. The next level to watch would then be the 50-day at 2,719, he said.
"Any time the market corrects like this, it's an opportunity to buy momentum," said Wald. He likes iShares Edge Momentum Factor MSCI USA MTUM ETF, up 2.3 percent Monday.
Now he's watching breadth indicators. "The quality of the rally will be very important," said Wald.