In the August 10 article, “Has a Mini Stock Market Crash Begun?” I stated that the S&P 500 (SPX) level of 2040 was major support and that a break below it could cause a selling panic. At the end of the trading day on August 20 this very important support was breached.
The next trading day the SPX closed down more than 64 points, a loss of 3.2%. This is the largest single one day decline for the SPX since 2011. A selling panic has begun.
Targets for a Panic Bottom
The August 10 article stated a time target for a possible bottom of August 19, this projection was based on the close correlation with the SPX in 2011. The current SPX is declining at a slower pace than in 2011. The most likely target date for a panic bottom could be August 31.
Markets sometimes move in increments of Fibonacci numbers, August 19 was 13 trading days after the July 31 peak. The next number in the Fibonacci sequence is 21. August 31 is 21 trading days after July 31.
There is a small chance a panic bottom could appear as soon as August 24/25, in 1987 the bulk of the October panic came in just one trading day on October 19, 1987.
Please see the illustrated daily SPX chart in Figure 1.
On August 21 the SPX broke below chart support at 1972.56 made on December 16, 2014, the next chart support area is the 1820 area of the October 2014 bottom.
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As of August 21, daily and weekly momentum indicators for the SPX have yet to reach over sold extremes experienced at intermediate bottoms. When markets break chart support they tend to gravitate to the next chart support zone. There is a high probability that the SPX could reach the 1780-1830 zone very soon.
US Dollar Index
In my June 15 article, “Now is the Perfect Time to Buy the American Dollar,” the focus was on the PowerShares DB US Dollar Bullish ETF (UUP).
Please see the illustrated daily UUP chart in Figure 2.
On June 15, UUP closed at 24.87, a few days later a modest rally began which ended on August 7 at 25.69 just .01 above chart resistance. Since that peak UUP has traded down. On August 21, UUP broke below near-term support at 25.00 and the 200 day Simple Moving Average (SMA) on heavy volume. This is a clear sell signal, sell all shares of UUP immediately and stand aside.
So far there is no evidence that the longer term uptrend in the US dollar index has been broken, yet with a clear sell signal and UUP at least for the short-term moving in sympathy with stocks, it’s not the time to be long this ETF. After the stock market put in at least an intermediate bottom, we can reassess the situation in regards to UUP.
Near-Term Plan for Stocks
In the next one or two trading days take advantage of any rallies to sell stocks. Since the breach of SPX support at 2040 there has been significant downside action in most stocks. There is a high probability of much more downside action next week.
Stock market panics are dramatic and scary, at the same time they provide a great buying opportunity. Stay calm and be prepared, a great time to buy could be coming very soon.