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S&P 500 Loses 1150 in Crash, Panic, Confusion...Error?

Stock-Markets / Stock Index Trading May 07, 2010 - 12:19 AM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis ArticleToday was a day I'll never forget. The most interesting day in my market life. What can one say when a market falls 1000 points on the Dow. Let's go over the set-up and how things worked out. What we can take from today ultimately.


We gapped down at the open today. The market (S&P 500) was working its way down towards 1150 or the line between bull-market and bear-market. We hit 1150 and bounced hard in a matter of minutes to 1159. It stopped there and worked its way down towards 1150 once again. It churned. It churned some more. Smaller bounces this time. An ominous sign. Slowly but surely we started to move below 1150. Every single institution on planet earth knew of the importance of this level.

As we fell further to the lower 1140's, I personally believe this kicked in a massive sell signal that the institutions responded to in a big way and flooded the market with massive sells. I believe this is what caused the selling that ran the market down 1000 points. No mistakes. No errors. Nice excuses but the reality is the massive sell signal flashed by losing 1150, and kicked in major institutional selling. Short covering ran the markets back up but in the end it was still a nasty day with the Dow down 347 points.

The S&P 500 fell 37 and the Nasdaq 82. The S&P 500 closed at 1128. A full 2% below that critical support at 1150. That is the bottom line. I don't care at this moment that we rallied back nicely. The bottom line is, we lost massive support and did so on massive volume rarely, if ever, seen before on some horrific market internals. A bad day for the bulls and a celebration day for the bears. Yes, there is some question on things based on the late 650 point rally, but again, it's still more about losing 1150 S&P 500.

So what about those internals. 4.4 billion shares on the Nasdaq. That's called, get me out, volume because we broke major support. In addition, you want to look and see how many stocks were down-to-up and on that level, no one can claim anything bullish about today's action. 11/1. Yes, that's 11 stocks down for every 1 stock up on the NYSE. It was 6 down to every 1 up on the Nasdaq. Hardly a reason for optimism.

If the numbers had been in line in terms of not being severe, say 3/1 or 2/1, then today could be taken with a grain of salt to some degree, but when you see 11/1 and 6/1, the reality is, it's get me out of stocks time. No bull can argue that today was an error when 11 out of 12 stocks fell on the NYSE. We have to respect the message being sent and today's message was we are now broken short-term but still above the 200-day exponential moving averages. Not that this is any real good news, but at least it's something the bulls can try to play spin doctor with for a while.

It didn't help the markets cause when CNBC was showing coverage of rioting in the streets in Greece. We saw bombs going off with fires burning. We saw people attacking the police and the police then fighting back suddenly and violently. Police using their sticks to hit people with the intent to injure. Not just little taps but full swings. A real riot, and that can never be good for a markets sentiment.

An amazing watch, but it shows just how bad things are around the world and the potential headaches this can cause other economies throughout the world, including our own. The markets around the world are responding to this mess and most of them had broken down a week or so ago. We were the last market to hold up. Today we joined the rest of the world. We had sent charts the past few days showing the breakdowns in different world markets. Now we're all broken down together.

When we look at the daily charts of the key indexes, we can see that although they are near oversold, even with today's action, they are not truly oversold. If they come close to getting as oversold as they were overbought, it could be quite some time before things turn back up. I'm not saying that'll be the case, but remember, now that we're broken, you have to understand that it is possible that we could get far more selling before things get to the point where buying will kick in from being just too oversold.

The rubber band took an incredibly long time to snap from overbought and because we're not even truly oversold yet. We have plenty of room for downside action if the market wants it. Stochastic's are averaging 21 and RSI's 33. They can go to 0/10 and 20/25 if they want, so please don't think we're too oversold for further downside movement. We're not at all. Doesn't mean that we will fall, but the oscillators are not saying buy me.

Today is still a bit confusing. We have to respect, on some at least, that we did bounce back 650 points on the Dow off the lows. It can signify some form of capitulation. However, we could spend months moving back down those long tails created today meaning more overall downside to come in the months ahead. You won't likely see anything like today again.

However, it doesn't mean anything good is coming for the bulls now. The worst may be over but that doesn't mean the selling is done by any means. For me, I have much to learn in the days to come. CASH is the ONLY way to play right now. Can't guess now. I need to see the markets behavior over the coming days to clarify today's action. Patience is an absolute must now. Please exercise it. This is unprecedented action. I have much to learn to gain the proper insight.

All I know for now that's certain is the S&P 500 lost 1150 on a closing basis and thus the up trend line off the lows is now officially gone. That's bearish action. No other way around that reality. Don't brush it off as being unimportant. It is extremely relevant and needs to be respected fully. Like I said, it'll take a few days of action for things to become clearer to me, but there's no arguing the breakdown for the moment. It's real and now the onus shifts to the bulls to see if they're capable of taking back 1150 on a closing basis with force. We move along here VERY slowly.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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