Today's Sell-Off Is Extreme, but Don't Panic Yet

The Chart Lab
  AUG 04, 2011 2:00 PM

The big question becomes, where does the bleeding stop? One might argue there may be much more to come.


Within the last nine trading days, the U.S. stock market, and specifically the S&P 500 Index, appear to be in a meltdown phase. Currently, as of Thursday’s trading session, the Index is nearly 100 points below the Moving Average (blue) Line (see chart). The last time price action was this far below the M.A. line was March 2009.

Click to enlarge

Although it appears most of the caustic fundamental news had filtered into the market during the past six to eight trading sessions, Thursday’s sell-off remains extreme. The reason being there is a combination of dynamic trading profiles taking place at the same time.

In general, for the moment, buying has dried up completely (those who stepped in front of the moving train in the last few days are “deer in headlights” at this juncture). Traders / investors who had been long for a period of time, during the last several months, and had not booked partial profits prior to the last few days, are now doing so in a panicked frenzy. In addition, once the institutional traders (hedge funds etc.) smelled blood, they added to the selling pressure to flush out any “weak” longs who were hanging on by a thread. Savvy traders who had the presence to sell in conjunction with the downside momentum, have not yet begun to buy back their positions for profit, as they are letting the position “ride” at this juncture.

The big question becomes, where does the bleeding stop? One might argue, there may be much more to come insofar as there's downside pressure toward the end of the year. However, at the time of this writing (12 p.m. EST Thursday), the chart reflects price action in the September S&P 500 Index at 1217.50. That price is directly on a proprietary support (horizontal green) line I identified dating back to March 2010. This could be an area where the market bounces temporarily, as panic wanes, as we conclude the week.

Potential buyers may be locked and loaded to bargain-hunt at this moment.

Twitter: @TheChartLab

No positions in stocks mentioned.