OIN SUBSCRIBER QUESTION:
"...and how would you recalculate support since we broke so far under 8000 today, well below 800 in the S&P and is being so oversold meaningful in a such a free fall?"
It's been hard for many, me included, to shift thinking toward using every rally as an opportunity to put on bearish positions and strategies only, as is appropriate for a major bear market. And to disregard technical considerations about oversold conditions and prior RECENT lows.
I have certainly had to RECALCULATE my thinking on this market, as I thought there was potential for the S&P 500 (SPX) to hold the 800 to 775 area, like at its 2002-2003 bottom and for the Dow 30 (INDU) to hold 8000, although I was also looking at potential 'support' around 7500 in INDU. I made some money buying DJX calls at 80, but only on a quite in and out trade. Did I turn around and buy the puts on the quick rebound back up to 89? No, although I retained some other puts bought at higher levels and am still short QQQQ where I have a 'trailing stop'. So much for the 'normal' prudent thing to not sell what is normally. The thing is I was captive to comparing THIS market to too many other market cycles that were more 'normal' in their trading swings.
IF the fundamental outlook for a major recession is true, then it would be natural for prices to retest the lows of the LAST recessionary market low and probably to exceed those lows in the major market indexes. Looking back at how oversold the market got back in the last MAJOR bear market becomes appropriate too.
For the first time in a long time, I find MONTHLY charts to be useful, as I'll show. It's necessary to go all the way back to '73-'74 (not shown) to see a sell off equal to our current one. In this 70's period, SPX sold off 47 percent from its highs before it reached bottom. As of today (Thursday), SPX is off 52.5 percent from its highs. If we compare levels of 'oversold' to the '73-'74 period, SPX is nearly as oversold in terms of monthly oscillators as it got at the September '74 bottom; e.g., the 13-month RSI got down to 17.4. Assuming the monthly close is at least equal to TODAY'S Close, the same RSI stands at 17.7.
If I go back to the 2002 bottom in terms of how extreme bearish sentiment got then, I witnessed my call to put daily volume ratio (CPRATIO) indicator, on a 5-day (moving average) basis, get down to .93 versus today's 1.05. Bearishness is finally building up substantially, where traders in mass finally are getting the idea to sell every rally. Bearish sentiment may get more extreme before this market bottoms, this being at least one of the mothers' of all bear markets!
Unlike most any other stock market cycle I've been in and I've been trading actively since the late-70's, in this CURRENT economic mess, it's necessary to use the fundamental backdrop to suggest WHICH chart points to reference and whatever other technical inputs as a yardstick. I missed the 1973-1974 bear market. I don't have that frame of reference and technical analysis works more than nothing with historical precedents.
We CAN look at very long-term charts for some ideas. In answer to where we might next see technical support/buying interest setting up, some of the charts provide some ideas, others do not.
If I try to come up with ideas of the possible low end of the downtrend channel or project out the downside rate of change per the S&P 500 daily chart below, an internal trendline (upper dotted line) some technical 'support' comes in at today's close. If I use a regular external trendline (lower dashed line), a low could set up closer to 680 in SPX.
By use of the long-term SPX monthly chart, its apparent SPX is below the prior low made during the last recessionary period. Keep in the mind that the last 'bar' below looks to have a Close, but that will change day to day UNTIL the last trading day of the month in this case. This chart is not helpful in assessing a next potential lower support implied by a prior major bottom. (There is obvious prior major support that developed in the 300 area, but its doubtful that SPX is going that low again!) In case you wonder, the DATE of this chart reflects the END of the month; it would be the end of this week if it was a weekly chart.
Taking a look at the S&P 100 (OEX) daily chart where I park my 'sentiment' indicator, it looks like there is potential technical support either in the 358 to low-350 area, or to as low as 330; over time, to perhaps 300.
You can also see the build up of bearish sentiment on the CPRATIO portion of the chart. However, if we assume this is a MAJOR bear market, there is going to be an even greater degree of bearishness at a final bottom.
The long-term chart is not helpful again with a prior price low that has already been exceeded, at least relative to the LAST bear market bottom. OEX will go to where it will. The very long-term chart is useful to show how extremely oversold this market is getting in terms of conventional indicators like the RSI; here the 'length' input is 13.
FINALLY, a prior low to suggest as a next downside target. It will be useful to pay close attention to the Dow 30 (INDU) in that there ARE prior lows (7416 and especially the 7200 area) that could set up to be a second bottom, even if an interim one. Savvy chart observers may notice the 'parabolic' type upside arc that developed up to recent top in the 14000 area. This 'straight up' type pattern is almost always followed by a sharp waterfall type decline.
AGAIN, another prior chart reference to suggest at least a target for this current decline, as seen in the Nas 100 (NDX) long-term (monthly) chart below. It wouldn't be surprising to see the even 1000 level get pierced, as it did previously when NDX fell to 795, before the index rebounded then fell back to 938 after which of course NDX mounted a sustained rally.