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Panic Selling

08/26/15 01:36:54 PM
by Mark Rivest

Global stock markets decline sharply. Does that mean it is time to buy?

Security:   SPX
Position:   N/A

Most participants in the stock market are probably stunned and surprised by the rapid decline in stock markets worldwide. For anyone viewing sentiment and momentum indicators during the last six months, the only surprise is how long it took before stocks crashed. Since at least March several stock market momentum indicators have been flashing sell signals. Stock market sentiment has been overly bullish for more than a year. The breaking of a major support level was the final catalyst in bringing about an onslaught of selling.

In my May 27, 2015 article "The Battlefield" S&P 500 (SPX) 2040 area was noted as the main defense line that the bulls must hold. Subsequent articles reiterated the importance of SPX 2040 and that a breach of that level could bring about panic selling by fund managers.

Late in the trading day on August 20, 2015 2040 was breached. The next day the SPX had the biggest one day decline since 2011. The next trading day, August 24, 2015 saw an even larger intraday move down followed by a sharp intra day reversal. Is the decline over? Let's look at some evidence.

Sentiment and Momentum Dimensions

Sentiment indicators -- VIX and put/call ratio have both reached levels that usually correspond to intermediate bottoms. However, weekly momentum indicators - stochastic, RSI, and MACD for the three major US stock indexes still have not reached levels seen at intermediate bottoms.

For international markets China is the star of the show. The Shanghai Composite weekly momentum indicators still haven't shown any signs of being oversold.

This index continues to have the clearest Elliott wave pattern of any stock index in the world. As of August 24, 2015, the Shanghai Composite appears to be in a third of a third down.

For those unfamiliar with Elliott waves, this means the Shanghai is right in the middle of a bear move down from the June peak and could continue lower for several weeks.

The combination of weekly momentum indicators and clear Elliott wave patterns on the Shanghai Composite tip the balance of evidence in favor of the bears.

Dow Jones Utility Average

One stock index that did not make a new low on August 24, 2015 was the Dow Jones Utility Average (DJUA). My August 21, 2015 article "Dow Utilities Ready For New High?" noted that if the DJUA has a sharp drop and holds above its June 30, 2015 bottom it could be a great time to buy utility stocks and funds.

The DJUA as of the close on August 24, 2015 is now at a point close enough to its bottom made on June 30, 2015 where the risk to reward ratio favors going long utility stocks and funds. In addition to stop loss orders on whatever stock or fund you buy, focus on the DJUA bottom at 548.09. A move below this level would indicate the next utility down wave has probably begun.

Near Term Plan

For the three main US stock indexes, as of August 24, 2015 it looks like most, but not all of the decline is over. If there is more downside to come, the major US stock indexes will probably chop their way lower.

The last full moon on July 31, 2015 saw a stock market peak, perhaps the next full moon on August 29, 2015 will see a stock market bottom. August 29, 2015 is a Saturday, so that leaves August 28 and August 31, 2015 as possible bottoming days.

The SPX major support zone 1830-1780 remains as the most likely area for an intermediate bottom. If the SPX moves into this price zone on either August 28 or August 31, 2015 it could be a gift for the bulls. Be prepared.

Mark Rivest

Independent investment advisor, trader and writer. He has written articles for Technical Analysis of Stocks & Commodities, Advantage, and, Finance Magnates. Author of website Four Dimension Trading.

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