Price Action Status of S&P 500, Apple and Nio

There is a saying that focus on what the stock is doing, rather than on what it should be doing because it helps you in deciding what to do and what not to do. Here’s my big picture take on S&P 500, Apple, and Nio stock

The risk of a deep market correction [S&P 500]

When the overall market undergoes a deep correction, then nothing gets spared and the only thing the market delivers – Xtreme pain.

Let us understand the current state of the S&P 500:

• Line of Support @ Point 1: In CY2021, S&P 500 took support at 3700 and rallied to 3850 by the end of Jan.
• Then, the correction set in due to the Wall Street rebellion/Gamestop saga, and there was a sharp pullback to 50 dma day moving average and 3700 levels again. [Point 2].
• The Bulls did not give up and the market rallied from 3700 to 3950 by the end of Feb (Point 3) but
• then correction set in again and this time, the reason was more fundamental: Higher 10 year yields. S&P 500 has now pulled back to 50 dma twice over the last 4 weeks. [Point 4]

Trading Rule: When a market breaks one moving average, then it declines to the next moving average.
WHAT IF S&P 500 breaks down below 50 dma? – It can collapse to the next support level i.e. 100 dma. It means a decline to 3700 in no time [Point 5]. Now, remember, the S&P 500 started going higher from 3700 in the first place at the start of the year, and hence coming down to that level will not be out of the ordinary. It will just be a correction of 6.3% from the highs and a 3% decline from current levels. 

What it will do? – When the market goes down, everything goes down. But in this correction, selling in Tech and growth stocks can be brutal and indiscriminate. Hence, one would be better off cleaning their portfolio from such names and be in defensive value stocks. Never say never, and hence let’s first see whether the market breaks 50 dma or not.

 Where is the support for Apple stock?

Apple stock made a nice uptrending move from 103 levels to 145 levels between October 2020-Jan 2021. But something dramatically changed during the last week of January 2021. And the stock collapsed to 119 by the last week of Feb, which was a Fibonacci pullback of 61.8% of the whole move. [145-103 = 42; 61.8% of 42 is 26; 145-26 = 119]. 

Hence, the level one support for the stock came around 119, just below 100 dma. Very Bullish traders would look to see the Apple stock getting support again at 119 levels. But what if, Apple continues to decline below those levels?

Trading Rule: A strong bull market stock usually finds support at a 200-day moving average.
The 200 dma stands at 114, which also coincides with Apple taking support at 100 dma in Nov 2020. Following price action, it seems the value bulls would be confident to buy around that level. Any breakdown there would cause a vertical collapse to 99 levels. 

There is a sentiment away from Large-cap tech stocks and hence I would not be a buyer in the Apple stock for now.

 Can Nio witness a brutal correction?
I don’t know, but the stock is in middle of a sharp pullback.

There was a golden period for Nio stock in 2020 and especially later half of 202 when the stock saw a vertical surge. The Phase 1-2-3-4-5 is a story of a strong uptrending stock that took support at various levels. It was only when the stock started breaking down, it raised alarm bells. The first breakdown happened below 50 dma [see point 6]. The stock collapsed to next moving average support of 100 dma [point 7]. Nio stock tried hanging on to that, but it broke down and is now racing towards 39 – the horizontal support level [Point 8].

What worries me the most: WHAT IF the Nio stock collapses below 39-40 levels? It will straight away go down to 30 levels or 200-day moving average and that can upset lots of EV believers.

Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers