MARKET FALLS AGAIN ON FRIDAY -- S&P 500 IS HEADED FOR TEST OF 200-DAY AVERAGE -- VIX HITS HIGHEST LEVEL SINCE BULL MARKET BEGAN IN 2003 -- THAT SUGGESTS THAT THIS CORRECTION COULD BE BIGGER THAN PREVIOUS ONES -- EXPECT SATURDAY MESSAGE
S&P 500 HEADED FOR TEST OF 200-DAY LINE... The stock market had another bad day on Friday as all major stock indexes closed below Thurday's intra-day lows (and again on heavy volume). The first three charts show the week's technical damage done to three of the major indexes. The Dow and the Nasdaq have broken their 50-day averages in decisive fashion. The Dow is close to breaking its June low. The Nasdaq in bearing down on initial chart support in the 2560-2535 region. The S&P 500, which has been the weakest of the three, has already undercut its June low (it did so on Thursday). It's now testing its February high near 1460. An even more important test will take place at its 200-day moving average near 1450. There's another technical reason why the 1450 level is so important for the S&P 500.
Chart 1
Chart 2
Chart 3
S&P TESTS ONE-YEAR SUPPORT LINE... The weekly bars in Chart 4 show a rising support line drawn under the lows of last June and this March. It currently sits near 1450 which is approximately the same level as the 200-day (or 40-week) moving average. That makes the test of 1450 doubly important next week. Needless to say, any serious break of that trendline would be more serious than anything we've seen so far. Please keep in the mind that the stock market hasn't suffered a 10% correction since its bull run began in March 2003. I've counted five previous corrections in that time span (not counting the present one). The average correction was 7.4% with the largest one at 8.8% (in 2004) and the smallest one at 6.1% (in the second half of 2005). I point this out because most market commentators I've heard seem to think this is just another minor pullback. Given how high the market has come, and how long t's taken to do it, it's not unreasonable to expect that a larger correction (of at least 10%) is probably overdue. On Chart 4, that would take the S&P down closer to its March low.
Chart 4
VIX HITS NEW FOUR-YEAR HIGH... One of the things we have to keep asking ourselves is whether or not anything has changed in the market's psychology. If it hasn't, then the market pullback might be expected to be similar to the previous 6-8% corrections. If something has changed, then something more serious on the downside might be in store. Which brings me back to the CBOE Volatility (VIX) Index. I made the point a week ago that rising VIX is usually bad for the stock market (just as a falling VIX has been good). Chart 5 shows that a peak in the VIX at the end of 2002 coincided with a major bottom in the S&P 500 (green line). I also pointed out that previous spikes in the VIX (like the start of 2004, the spring of 2005 and 2006, and this February) were accompanied by market pullbacks. Those pullbacks were relatively minor. Friday's VIX close of 24.17 puts it at the highest level since the spring of 2003 when the bull market in stocks began. That alone is enough to suggest that this pullback may be different that the previous five. Just something to think about.
Chart 5
EXPECT SATURDAY MESSAGE ... I've been writing all week about sell signals on bar charts, point & figure charts, and various breadth indicators. The 13-34 EMA system also gave a sell signal for the S&P for the first time in five months. It's now obvious that the market has entered into a downside correction. The bigger question is whether or not something more serious is happening. To do that, we have to consult weekly and monthly charts and their indicators. I'll be doing that tomorrow (Saturday) after the dust has settled a bit and all of our indicators and market data are available to us. You can expect another Market Message to be sent sometime on Saturday afternoon dealing with the bigger picture.
