The market rebound may not come before another scary test of the October lows, chart analysts say

  • Wall Street was looking for a rally coming out of the midterm elections, but instead the same worries that were around in October continue to weigh on stock prices, and the rally is likely to be delayed.
  • Strategists say the market has taken a hit technically, and so have some key stocks, setting the market up for more selling that could lead to a test of October's lows before a move higher.
  • "When the leadership area catches a cold, the real weak areas of the market catch a full-blown flu," said one strategist.
Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE), June 25, 2018 in New York City. 
Drew Angerer | Getty Images
Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE), June 25, 2018 in New York City. 

Wall Street has been waiting for a year-end rally, but some strategists say it's more likely the market will see more selling before staging a real comeback.

Investors have been counting on the fact that midterm election years are often good for the stock market in the final months of the year. However, this year's October sell-off has extended well past the election and into November.

"The market's going to want a little more clarity around the issues we've been talking about — trade, global growth and what are the expectations for the Fed. I think it's going to be dependent on those types of things rather than that it's after the midterm election," said David Lefkowitz, senior Americas equity strategist at UBS Global Wealth Management.

Stocks were battered again on Wednesday, with the Dow Jones Industrial Average losing 205 points and sliding below its 200-day moving average, a key momentum indicator that can signal a trend change. However, the Dow did recover from a dip below 25,000, an important psychological level, and ended the day at 25,080. The S&P 500, already below its 200-day moving average, slid under the key 2,700 level but was able to hold above it to close at 2,701.

"I still think there's a good chance stocks will find their footing .... If we get some indication that China and the U.S. are trying to find some common ground, I think the markets would take that very well, and we could see a nice rally at that point," he said. President Donald Trump is expected to meet with Chinese President Xi Jinping at the G-20 summit at the end of the month, and there is some expectation that the meeting could help change the tone of trade friction between the U.S. and China.

"I don't think we'll get any sweeping agreement at the G-20. I think it's going to be more incremental than anything else, but even that would be enough to give investors a little more confidence," Lefkowitz said.

But traders are looking at some of the damage to stocks such as Apple and the FANG names. Apple also was below its 200-day moving average and ended down 2.8 percent, at $186.80.

"Right now, it looks like no one is in a rush. Everything's broken. Every rally's being sold," said Scott Redler, partner with T3Live.com. "Until that trend changes where rallies aren't sold and lower highs turn into higher highs, traders are going to sit back."

Ari Wald, technical analyst at Oppenheimer, said he sees the damage to Apple as temporary and its chart still looks strong, but he's worried about other areas of the market, such as energy. "[Apple's] been the latest to correct. It had been holding up better. It weakened considerably in the last few weeks. When the leadership area catches a cold, the real weak areas of the market catch a full-blown flu," said Wald. "Tech is still fine for the longer term, after a terrific run."

"I think investors are a little more despondent on this pullback. I think this does set the stage, once we set a floor, that we can head to the upper end of what we see as this developing range," he said. "There's going to be a more tactical time to take a more cautious stand. If we do get the strength, as I expect, there's going to be some pretty big divergences, and that sets the stage for a bigger pullback in 2019. We are expecting a rally, but this is the point in the cycle where it could be focused in high-quality large caps."

No Santa Claus rally

Art Cashin, UBS director of floor operations, said the fact the market held big round psychological areas on the Dow and S&P 500 Wednesday was a positive, and it's possible they could turn into areas of support. But he sees more choppiness ahead and no rally for a few weeks.

"I think for the short run, we have to put Santa Claus' picture on a milk carton, but maybe a week or two after Thanksgiving, we can go looking for him again," he said. The Thanksgiving holiday is next Thursday, and the market is closed that day and open for a shortened session on Friday.

The market is also reacting to the idea of new regulatory risk, post the midterm election. A shudder went through the market Wednesday when California Democrat Rep. Maxine Waters said easing bank regulation would come to an end when she chairs the House Financial Services Committee. That hit the broader market and knocked banks shares lower, with industry leader J.P. Morgan Chase losing 2 percent.

"The market is more open to bad news than good news," said Art Hogan, chief market strategist at B. Riley FBR.

Strategists say if the S&P 500 fails to hold key onto the 2,700 area, it could break down all the way to 2,603, its October low.

"Technically, you want to go back and touch that. If it holds, you have something to lean against and perhaps the market will start reacting to positive news," said Hogan. The market could start looking better in the next week, since the five days before Thanksgiving are usually a good time for stocks, he said. According to the Stock Trader's Almanac, the Dow was up in the week before Thanksgiving 19 of the past 24 years.

But Hogan said there is a chance trade developments could turn into a positive later in the month. "If we're definitely talking to China about trade and we're going to discuss that at G20, if you make that go away a lot of things get better," he said, noting global growth fears could diminish.

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