Stocks: In Search of a Bottom
In this kind of market environment, the prudent technician can only lay out potential support levels. We think that until a price reversal is traced out, with evidence of accumulation by institutions, it is quite hazardous to be guessing on where the bottom may lie.
The S&P 500 has dropped into the top of another pretty good area of support after failing to hold the 1440 to 1460 area. However, we still think this initial support zone is somewhat valid, because the S&P 500 only finished below this area on Friday, and we think Friday’s action represented another in a series of selling capitulations.
If we take out the 1440 level once again, the next area of chart support sits in the 1395 to 1438 range. There are other pieces of technical support in that range, so it makes it that much more important. Long-term trendline support, off the highs over the past couple of years, sits at 1426, very close to Monday’s intraday low.
A 61.8% retracement of the rally off the March lows, targets the 1437 level. The 65-week exponential moving average lies at 1411 with the 80-week exponential average at 1390. If this zone of support is taken out, there is long-term trendline support, off the lows of the past couple of years, at 1330. The top of the next zone of chart support sits in the 1325 area.
The S&P Financial index is down a nasty 15.2% since its February closing high, with most of that decline occurring since mid-July. The index has also fallen into a zone of multiple technical supports. Chart support lies in the 422 to 439 range. Trendline support is at 439, taken out Friday (only one day) and recaptured on Monday. Based on the width of the double top, we could see a measured move down to 421.
The next chart support below the one already mentioned comes in between 371 and 411 while a 38.2% retracement of the entire bull market (since 2002) in Financials targets the 411 level.
Stepping back a bit, we think the overall market is washed out. Put/call ratios have soared, NYSE Short Interest is at an all-time high, Odd-Lot Short Selling has exploded, market sentiment polls have reversed quickly, talk of a potential market crash has picked up quite a bit, the majority of stocks have been thrown out along with financials, and market internals as well as price data are extremely oversold.
In our view, these are all “potential” positives, but it really doesn’t matter in a market filled with fear. That’s why we think it is always smart to let the market tell you that it has finished going down.
