Note: S&P chief technical strategist Mark Arbeter issued this special update on Sept. 15.
The stock market crumbled this morning as the carnage in some of the major financial companies continues to weigh heavily on Wall Street. If the markets don't stabilize in the first hour of trading, we think an ugly day could turn into a disastrous day. The two keys, in our opinion, are how the major indexes act as they reach their recent lows and what reaction we will see in market sentiment.
For the S&P 500, key support lies between 1200 and 1215, for the Dow Jones industrial average it is in the range of 10,828 to 10,963, and for the Nasdaq, critical support lies between 2167 and 2216. Our belief is that these areas of support will give way to another leg to the downside.
Support levels for the S&P 500 begin with the pivot low in October, 2005, in the 1170 zone. This 1170 area corresponds exactly with a 50% retracement of the entire bull market, which is the next key Fibonacci support level. Below this potential range of support, there is a nice layer of chart congestion that lies between 1063 and 1150. This is from the sideways action from back in 2004. A 61.8% retracement of the bull market targets the 1078 level, right in this second zone of chart support.
For sentiment, we would like to see skyrocketing put/call ratios, something that has been sorely missing during the latest weakness. We would also like to see the volatility indexes move sharply higher today.
A VIX (S&P 500 market volatility index) well north of 30, possibly above the 35 level we think would do a lot toward showing some real fear and panic in the options market. We believe that until we get some real panic in the majority of the sentiment readings, a real bottom to this bear market is unlikely.
We think that the good part to a major washout is that the quicker that prices drop, the quicker we are likely to get a market bottom.