Yesterday the enormous rush of sellers demolished all near-term support and sent the major indices almost 5% lower. The rush to sell pummeled NYSE stocks with volume of 1.8 billion shares as 91% of all stocks on the Big Board and Nasdaq showed a loss for the day. The Nasdaq had its worst day since Nov. 12, 2008.
The S&P 500 easily broke 1,223, the number needed to confirm a breakdown from the neckline at 1,263. That break establishes a minimum target of 1,143, but it is more likely that the ultimate bottom of this global sell-off will lie somewhere within the zone of last summer’s trading range at 1,040 to 1,130.
The seven-month sideways pattern of the Dow Jones Industrial Average finally gave way. The selling, which picked up dramatically after 2 p.m. Thursday afternoon, not only crushed the March 16 low at 11,555, which many technicians highlighted as support, but the major bull market support line at 11,500.
And just to put the bear’s honey on the cake, the Dow Jones Transportation Average broke to a new low, providing Dow Theory purists with undisputed confirmation of a new bear market. Note that the new low broke from one of the most bearish of all chart patterns, the “Bearish Horn” (StreetSmart) or “Broadening Top” (Edwards & Magee). A breakdown from a horn is unusual but, according to StreetSmart, one of the most accurate of all formations.
Commodities may also have topped. This makes sense for several reasons. The first is that stocks and futures are both impacted by slowing global economies which means less demand for raw materials to produce and ship. The second reason is that there is a rush to meet margin calls in both stock and futures markets and that sort of forced liquidation takes little account for value—margin calls must be met and so strong and weak assets alike are sold.
Until yesterday, the CBOE Volatility Index (VIX) showed unusual complacency. But that was shattered under the emotional wave of selling that overwhelmed the markets in the afternoon and drove the VIX up over 35%. And so fear has replaced complacency. It is now higher than the year’s prior closing high made in March at 29.40.
Virtually all sectors participated in yesterday’s sell-off driving them to the lowest levels recorded in over two years by our internal indicators (MACD, Stochastic). After such an emotional rush to sell, markets usually have a bounce and today’s payroll numbers could provide for one, especially if the Nonfarm Payrolls number is greater than the projected 75,000 or if the unemployment rate falls below 9.2%. Nevertheless, no rebound is likely to reverse the current downdraft. A rally is probable and it could run to as high as the breakdown at 1,223 before falling back to new lows. Investors and traders alike should sell into rallies.
Traders should aggressively short stocks with high P/E ratios.
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