GRAY MONDAY, BULK OF THE EVIDENCE HAS TURNED, TREND IN FORCE UNTIL, MARKING FIRST RESISTANCE, NIKKEI BREAKS, FTSE HITS 30-MONTH LOW, DAX AND CAC TREND LOWER, EURO AND YEN SURGE
GRAY MONDAY REARS ITS UGLY HEAD... Stocks are in the midst of a global rout that is turning into another Black Monday - of sorts. So far, there have been three Black Mondays in stock market history. The first was on October 28th, 1929, when the Dow fell 13%. This was followed by another double digit decline on Tuesday, October 29th. The second occurred on October 19th, 1987, when the Dow fell 508 points and lost 22.61% in just one day. This was a true crash. The third was on September 17th, 2001, when the Dow fell 7.13%. This decline followed the terrorist attacks on September 11th. As the charts below shows, the 1987 crash was preceded by a support break and the 2001 decline was preceded by a triangle break.
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Chart 1
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Chart 2
The major stock indices were down 3-5% in early trading on Monday, but down 8-11% over the last five trading days. As far as "Black Mondays" are concerned, this one is looking pretty tame so far and I would call it just a gray Monday. Chart 3 shows a Performance SharpChart for the S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100 over the last five days (including today). All are down sharply with the Nasdaq 100 leading the way. The S&P Small-Cap 600 is down the least, but this is of little consolation given the steepness of the five day decline.
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Chart 3
BULK OF THE EVIDENCE HAS TURNED... I showed bearish charts of the individual AD Lines and High-Low Percent indicators on Friday. These indicators can be combined by using the breadth indicators for the S&P 1500, which represents small-caps, mid-caps, large-caps and the Nasdaq 100. As these broad indicators confirm, the bulk of the evidence turned bearish for the stock market last week. Chart 4 shows the S&P 1500 trading in a range from March to July and breaking range support on Thursday. This break signals an uptick in selling pressure that was strong enough to push prices to their lowest level in six months. The second window shows new lows expanding as the S&P 1500 High-Low Percent ($SUPHLP) plunged below -10% for the first time since October. The third window shows the S&P 1500 AD Line ($SUPADP) peaking in May, forming lower highs into July and breaking the March low in late July. The indicator then moved to its lowest level since January. The bottom window shows the S&P 1500 AD Volume Line ($SUPUDP) peaking in May, forming a lower high in June and breaking support in early July. The indicator then moved to its lowest level since October. This bearish sequence reverses the bullish signals triggered at the end of October.
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Chart 4
THE TREND IS IN FORCE UNTIL... There will now be a lot of speculation on support levels, oversold conditions, selling climaxes and the depth of the decline. Truth be told, nobody knows when the market will get an oversold bounce, where the major stock indices will find support or how far this decline will extend. We could see a short spike like October 2014, a five month correction like 2011 or a bear market like 2008. At this point, I am focused on the right side of the chart and the current downtrend. According to Dow Theory, the trend is in place until proven otherwise. Moreover, neither the length nor the duration can be forecast. Chartists simply need to identify the trend and trade accordingly until it changes.
MARKING FIRST RESISTANCE LEVELS... Chart 5 shows the S&P 500 breaking down with a sharp decline below support. This is clearly a trend-reversing event that remains in place until proven otherwise (reversed). Broken support in the 2050 area turns first resistance to watch if/when there is an oversold bounce. For now, I will base key resistance on the highs from late July and August (2115). With the overall trend down, resistance levels are the most important levels to watch because they hold the key to the current downtrend.
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Chart 5
In the spirit of speculation, I have also added a few annotations to speculate on support and a bounce for the S&P 500. A 62% retracement of the October-May advance would extend to the 1940 area. A 10% decline from the current high would extend to the 1925 area. Chartists speculating on an oversold bounce can watch this 1925-1940 area for an intraday reversal that might setup a rebound. Playing an oversold bounce, however, is very tricky and dangerous. Note that the S&P 500 was oversold at 1900 on October 23rd and ended up spiking to 1825. We are likely to see some volatility in the coming weeks as the market sorts through the recent carnage. It might be a good time to take a break from the market and clean the garage (tongue in cheek).
SHANGHAI COMPOSITE LEADS ASIA LOWER... The global sell-off continued in Asia on Monday with the Shanghai Composite ($SSEC) falling over 8%, the Hang Seng Composite ($HSI), losing over 5%, the Nikkei 225 ($NIKK) dropping over 4% and the Bombay Sensex 30 Index ($BSE) declining almost 6%. Chart 6 shows the Shanghai Composite breaking below its July low with a move to 3209 on Monday (red bar). The trend is clearly down, but Fibonacci users will notice that the index has retraced 61.8% of its prior advance (June 2014 to June 2015).
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Chart 6
Chart 7 shows the Nikkei 225 breaking below its May-July lows with a sharp decline on Monday (red bar). The November-January lows and 62% retracement mark the next support zone in the 17000 area. The indicator window shows the Nikkei still outperforming the S&P 500 as the price relative rises. The Nikkie is under added pressure today from a rising Yen.
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Chart 7
FTSE HITS 30-MONTH LOW TO LEAD EUROPE LOWER... This is truly a global sell off because European stocks were the next to open and the next to move sharply lower on Monday. Chart 8 shows the German DAX Index ($DAX) falling almost 8% last week and another 6.58% during the day Monday. The index broke support in June, bounced in July and broke to new lows in August. The trend here is clearly down with the middle of the 2014 range marking the next potential support zone in the 9300-9500 area.
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Chart 8
Chart 9 shows the French CAC Index ($CAC) forming a lower high and breaking below its July low on Monday. The trend since April is down, but the index may be nearing support from broken resistance and the 62% retracement in the 4400 area.
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Chart 9
Chart 10 shows the FTSE Index ($FTSE) falling to a 30-month low. Note that the FTSE and LSE stocks are updated with 20-minute delayed data for subscribers. The index broke the lows from October 2014 and June 2013, which makes it one of the weakest stock indices in Europe. The indicator window shows the $FTSE:$SPX ratio falling since 2013 as the FTSE underperforms the S&P 500.
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Chart 10
EURO AND YEN SURGE AGAINST THE GREENBACK... There are not many places to hide during a crisis. Bonds have attracted some money as a safe-haven, John Murphy pointed to strength in gold because of Dollar weakness and the utilities sector has held up the best of the nine sectors. Note that chartists can find the safe havens by looking for strong StockCharts Technical Ranks (SCTRs). Notice that the SCTRs for the Euro ETF (FXE) and the Yen ETF (FXY) surged above 90 last week. This means they are in the top performance decile for our ETF universe, which excludes inverse and leveraged ETFs. Chart 11 shows the Euro ETF forming a higher low over the last six months and breaking out with a surge above 112.5 today. The SCTR moved above 90 and to its highest level in over 3 years.
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Chart 11
Chart 12 shows the Yen ETF breaking above its July high with a surge above 82. While this breakout is certainly positive, the Yen has a much weaker looking chart than the Euro. Follow through above 84 is needed to produce a breakout of consequence.
