MARKET HAS WORST DAY IN YEARS -- VIX SOARS 60% -- PUT/CALL RATIO HITS FOUR-YEAR HIGH -- WEEKLY MACD LINES TURN NEGATIVE

VOLATILITY INDEX SURGES ON PUT BUYING ... When investors get nervous about the stock market, they buy puts. That negative sentiment is reflected in rising volatility indexes. And the two most closely watched volatility indexes soared today as the market fell heavily. Chart 1 shows the CBOE Volatility (VIX) Index soaring 60% in one day to the highest level in seven months. That isn't too much of a surprise since the VIX trends in the opposite direction of the stock market. What is surprising is the size of the day's gain. [The Nasdaq Volatility Index (VXN) soared 40% to a new six-month high]. The extremely heavy selling of puts is also reflected in the CBOE put/call ratio which soared to the highest level since the bull market started four years ago (Chart 2). Unusually high spikes in the put/call ratio are often associated with short-term market bottoms (or a market that's fallen too far too fast). The fact that the ratio reached a four-year high, however, reflects a sudden and dramatic shift in market sentiment from complacency to outright fear.

Chart 1

Chart 2

STOCK INDEXES PLUNGE ON HUGE VOLUME... There's no hiding the fact that today was one of the worst days for the stock market in years. It started with a 9% collapse in the Chinese market and spread around the world. Emerging markets were the hardest hit. The selling spread from Asia to Europe and then to North and Latin America. The next three charts show the technical damage done today to the three most heavily traded Exchange Traded Funds. The Nasdaq 100 Shares (QQQQ) plunged 4.1% on the heaviest volume in months (Chart 3). It also undercut its late January low. The Dow Diamonds (DIA) fell 3.7% and shattered initial support levels -- also on huge volume. The S&P 500 SPDRs (SPY) lost 3.9% and undercut both its 50-day average and its January. It's not a pretty picture. All market sectors and industry groups fell. The only winner was Treasury bonds which soared in a massive flight to safety.

Chart 3

Chart 4

Chart 5

WEEKLY MACD LINES TURN NEGATIVE... I'm going to give a short and long term view of the Dow. First the short view. The hourly bars in Chart 6 show the Dow having reached a very short-term oversold condition. That suggests to me that the day's selling was overdone. Hopefully, that will lead to a relief rally over the next day or so. That's the good news. The bad news is that the weekly MACD lines for the Dow have turned negative for the first time since last May (Chart 7). That suggests that there's likely more downside action to come (hopefully after a relief bounce). The horizontal lines on Chart 7 are Fibonacci retracement lines. They should be kept in mind as possible support levels. The first level of support is at the 38% retracement level near 12000. A second one is the 50% retracement level near 11754. I suspect that the Dow will fall somewhere between those two lines. Global stock markets have taken a decided turn for the worst. Today's action appears to warrant a much more defensive attitude. I'd use any minor bounces to take some profits or some appropriate action to hedge against any further losses. Chart 8 shows Treasury notes surging today in a flight to a safety.

Chart 6

Chart 7

Chart 8