Panic Seizes the Markets – What Now?

The expression “This is a very technical market” was heard again yesterday. And I would agree in the sense that even though technical barriers are falling due to fear and subsequent panic, they are providing us with valuable trigger points that when violated tell us that prices are headed lower.

Yesterday, rumors of rating cuts for the debt ofFranceshifted the focus back toEurope. But they also stocks lower. 

Volatility as measured by the CBOE Volatility Index (VIX) increased by more than 20%. The Dow Jones Industrial Average fell 520 points (4.62%) and the Dow Jones Transportation Average was off 184 points (4.04%) on NYSE volume of 2.1 billion shares.

In the past couple of days, we’ve covered the S&P 500 and suggested that its trading range of last summer (1,040-1,130) could provide support for a bottom. Yesterday’s decline of 52 points places the S&P 500 within that zone for the third successive day, but not below a reversal from the zone at Tuesday’s low of 1,101. That’s a number to watch since a close under 1,101 could trigger another massive sell-off that could drive prices to the bottom of the zone or through it.

But back to the Dow charts:

DJI ChartDJT ChartTrade of the Day Chart Key

The Dow Jones Industrial Average has a similar pattern to the S&P 500. Note that the minimum target of the neckline break was 11,114. That target was exceeded on Monday with a thrust into last summer’s trading range of 9,614 to 11,258.

For three days, the Dow industrials has been hitting the upper limits of last summer’s range. At the same time, the Dow transports have poked into their summer 2010 range. But the transports broke into it following a huge distribution top (horn), which is a bearish formation. And a penetration of Tuesday’s reversal at 4,296 would reinforce the possible break of the S&P 500 mentioned above.

Conclusion: Panic has finally seized the markets with downside volume days of 87-to-1 and 81-to-1, and all of the year’s gains have vanished in just 10 trading sessions with the Dow falling over 2,000 points since July 21. And volume on down days has more than doubled the average volume of the year. 

The financial press is in a panic, too, with consecutive comments from analysts to “stay out of the market,” “take shelter,” and one even said to “find a rabbit hole.” This is usually the stuff that selling climaxes are made of. But, for now, it’s advisable to stand aside to see if Tuesday’s reversal holds and if the market can stabilize within last summer’s trading range.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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