How Low Can The Market Go?

Written by Jim Welsh

Macro Tides Weekly Technical Review 24 December 2018

I hope your Christmas is spent with your family and that Santa stopped for cookies at your home. Today's report is shorter than usual so I can finish wrapping presents.

From its low in February 2016 at 1810 to the September 2018 high of 2940, the S&P 500 rallied 1130 points. A 50% retracement would target 2375 which was exceeded on December 24.


The 61.8% retracement is 2242. The red trend line connecting the March 2009 low with subsequent lows in October 2011 and February 2016 comes in near 2300.

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The unrelenting nature of the decline confirms that the S&P 500 is falling in wave 3 which shows no signs of being complete. Once wave 3 completes, wave 4 could lift the S&P 500 150 - 200 points as wave 2 allowed the S&P 500 to rally from 2603 to 2815. Once wave 4 is complete wave 5 is likely to draw the S&P 500 below the low wave 3.

The 21 day Net percent of Advancing stocks minus Declining stocks closed at -29.1 on December 24, one of the lowest readings since the 1987 crash, 1998 Long-Term Capital Management selloff, September 2001 after 9/11, July 2002, and financial crisis in 2008. In each case, the S&P 500 experienced a rally and then a subsequent decline to a lower low that recorded a less oversold reading.

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For weeks I've cited the lack of fear as measured by the Trading Index (TRIN) as an indication that the market was vulnerable to more weakness. As of December 24, the 10-day and 21-day moving averages are finally above 1.30.

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I have also noted that the Call/Put Ratio did not show the level of pessimism that is often a sign that a trading low is developing. As of December 21st, the Call/Put Ratio has fallen reaching a level that is commensurate with a trading low.

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The TRIN readings and the Call/Put Ratio suggest the S&P 500 is in the zip code and close to finishing wave 3 soon. After wave 4 carries the S&P 500 up by 150 - 200 points, a decline to a lower low is likely to follow in wave 5. Wave 4 could take the form of a triangle as investors sell rallies but buy above the wave 3 low. Triangles are extremely choppy but end with a thrust down to conclude a larger selloff.

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Disclosure: The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a ...

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Moon Kil Woong 2 years ago Contributor's comment

Sadly the market can go much lower, especially since oil collapsed soon after #Trump begged Saudi Arabia to lower oil which is now lower partially to kill US #oil production increases. As a warning to Trump, be careful what you ask for. US oil drillers should be furious besides big oil. Exxon and Shell are fine regardless of where oil goes in the short term. Expect Texas and other oil states to hurt.

Although oil isn't the main factor in the decline, it certainly will affect the US going forward. It is also a proxy for US health going forward. If Americans cut oil production that bodes poorly for consumption of everything else.