How far down could panic pull stocks?
Some scary chart patterns are reflecting the phases of greed, denial and fear that accompany major market tops. One scenario points to a double-digit drop from here.
Panic is in the air. You can see it in the way the S&P 500 has plunged in a big one-day drop below its 200-day moving average -- just as it did before the 1929 and 1987 market crashes. Or in the way the CBOE Volatility Index, a measure of Wall Street's fear, jumped above its 50-day average -- a level associated with significant pullbacks. Or in the way the interest rate on 10-year Treasury notes (1.47%) has dropped to its lowest level ever as investors seek safety in the arms of Uncle Sam -- pushing inflation-adjusted yields deeper into negative territory. The previous record (1.55%) was hit after Thanksgiving 1945.
If people are willing to pay the government for the privilege of investing in T-bonds, you know things are bad. But really, how much downside risk is there for stocks? Let's take a look.
In my last post, I surveyed the economics of our predicament. And they weren't good. Now, from a purely technical perspective, things look even worse.
The NYSE Composite has three separate but connected head-and-shoulders reversal patterns in play. They are reflections of the phases of greed, denial and fear that accompany major market tops. The daily chart, shown above, has already seen the pattern fully played out. Formed between February and May, the reversal pattern suggested a target of around 7,500 on the index, a level that acted as a support range late last month.
But now we've fallen through that level, putting the November and December lows in play.
Backing out, the weekly head-and-shoulders reversal pattern that has been forming since the panic over the first Greek bailout back in 2010 is now in play. If the neckline support at around 7,000 fails, which is only a 3% drop from current levels, the new target would be around 5,300. That would be worth a 27% drop from here.
That's not all.
Backing out even more, an epic monthly head-and-shoulders reversal is in play, too, starting when the dot-com bubble burst back in 2000. The shoulders of the pattern aren't perfectly symmetrical, but the 2002-03 and 2009 bear market lows are eerily close. That's the neckline support. And if it's broken, the pattern suggests a price target of minus 1,000 based on the distance from the neckline to the head, which is that 2007 bull market high. Well, let's just call it zero.
Technical analysis is more art than science. There are no hard-and-fast rules, only tendencies. So take this with a grain of salt. But it is worth noting that other long-term indicators -- such as trading volume, fund flow data and cumulative breadth measures -- paint a similarly dark picture.
It won't be a straight shot there. As I discussed Friday, I expect both the Federal Reserve and the European Central Bank, unbounded by falling energy prices and a global growth outlook that's deteriorating quickly, to inject fresh monetary stimulus into the financial markets later this month. That, combined with some type shift by the Germans away from their hardline stance against deeper eurozone integration (via sovereign liability sharing and/or a euro-wide bank deposit insurance scheme) should set off a short-cover rebound rally.
While economics suggest the bounce won't last long, the technicals paint a grim picture of what lies beyond.
Selling pressure is currently focusing on the financial sector, and one industry group within it is just now starting to fall out of its February-May topping pattern: regional banks.
Existing precious-metal positions continue to perform well, with Great Basin Gold (GBG) a standout worth highlighting.
I found both RF and FULT with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommended RF short to his newsletter subscribers.
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Wow selective reasoning.
It's *at* it's 200 day moving average. It has not "plunged thru it" that would mean it sliced thru it by 1% (usually more) lower with no bounce back. It's 6 points below it's 200 day MA.
And as before, you've missed the first shoulder. As most commonly do. First should was in 1997/98 during the Asian crisis. Second (head) was .com bust, Third (shoulder) was 2008 crisis.
We are in middling pattern going forward for the long. Yeah, we could pull back, and even past 1100 on the S&P (though, I doubt that likely). But we won't go back down to 670.
How's GLD looking today. Oh yeah, no break out above 50 day, mired below 200 day on the long side.
It is already down about 3000/4000 points. The figures you are seeing in the 'markets' are a 'contrived' necessity to show that ... it is not bad. It is probably much worse than what I stated. It gives these 'cronies' a bottom from which to do the same and they will. So, when it 'drops' 3/4 they have already covered their butts. We are heading into more than a double dip recession and 'they' already know. Mark it!
DOW: 800 Could It Happen in a Economic Collapse?
Tell me what you think........ Please reply
considering the western economies have collapsed with Japan , the USA and Europe owing more money than they can ever pay back in a hundred years.
I would say the market this time around will hit pretty close to the lows seen in the second leg of the Great Depression which was like what DOW 52 ???
It's over folks. The BRICS are officially trading with each other in their own currency. So who needs worthless yen or euro or dollars ???
You can't have New World Order AND Free Markets. Guess which we have right now?
Trick question. We've never had free markets. This "free market" business is a farce because free markets have never existed. There has almost always been some measure of manipulation on any market, be it tarriffs, taxes, antitrust laws or any other form of regulation.
You need to kill this dream of "free markets" because they don't exist and for good reason.
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Try as the bears might, they couldn't break US stocks. But investors still face frothy prices and considerable headwinds.
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