I’ve been calling for “the drop” for a couple of weeks now and yesterday could have been the start of a much lower market. The Dow fell 504 points, or 4.42% on Monday, its largest point drop since the September 11 attacks. The were numerous stories and subplots in yesterday’s trading but the market was hammered by the financial stocks once again.
The S&P 500 fell a staggering 59 points, or 4.71%, to 1,192, and the Nasdaq dropped 81 points, or 3.6%, to 2,179.
The volatility we have been having was a clear sign of the nervousness in the market. When you have 300-point swings in the Dow like we had last week, either we were going way higher or way lower. There were no real catalysts for the market to move higher although one could argue that the drop in oil and a higher dollar were bullish signs and yesterday’s drubbing was not that much of a surprise.
The market failed to hold key technical levels and it was written all over the charts. The resistance levels were 11,800 for the Dow; 2,450 for the Nasdaq; and 1,300 for the S&P 500. We were right at these levels for much of last week and we failed to break through them. I had mentioned that until they are broken the market would continue to see choppy, volatile action but that it would not be a good sign if we failed at these levels again.
The support levels were 11,000 for the Dow; 2,200 for the Nasdaq; and 1,200 for the S&P 500. Guess what? The market wounded three birds with one stone. I had mentioned the VIX (VIX, 31.70, up 6.04) was at 25 last week and was headed to 30. We hit 30 yesterday and when the VIX is at 30 or higher, it means the market is nervous…really nervous. We saw panic yesterday and we might not be through. The 52-week high for the VIX is 37.57.
We’ve had much success by shorting the market recently, especially the financials, but we are getting real close to some of the best bargains we will ever see. There are going to be numerous companies that we will be able to buy longer-term call options on that could pay-off big. We may get a “dead cat bounce” today but I expect a lower open this morning.
Rick Rouse
Rick@OptionsMentoring.com
