Market Fell, but not a Crash

We need context after the moves that we have seen the last few sessions. Now pundits wanted to paint the action yesterday as a black Monday. But if you lived through 1929, 1987, and 2001, you would truly understand what a true “Black Monday” or “Crash” looks and feels like. This first “Black” Monday was in October of 1929, when the Dow fell 13 percent. This was followed by another double digit decline on Tuesday. The second occurred on October 19, 1987 when the Dow Jones lost 22.61 percent in just one day. That was a true Crash. The third was on Monday September 17, 2001 when the Dow fell 7.13 percent. This decline followed the terrorist attacks on September 11th.

Now the above dates have something in common, they were ugly one-day moves, and the day after each of these moves saw ugly,if not worse action. The action yesterday, major stock indices were down 3-5 percent, was far from a correction. Movement over the last 3 trading days, down 8-11 percent, but not in a correction mode.  All in all, as “Black Mondays” go, this move Monday is more of a 50 Shades of Gray type of Monday.

While I have no idea where the next move is there is going to be a ton of guesswork on support levels, oversold conditions, selling climaxes, and the depth of the decline. Be leery and careful of any and all forecasts. Nobody knows when the market will get an oversold bounce, where the major stock indices will find support, or how far this decline will extend. So what are we potentially looking at, a spike like October 2014; a 3-5 chop to the downside or a 2008 bear market.

Now I said that it is impossible to know what the next move is in the market, we can game plan. With the S&P 500 breaking down with a sharp decline below support, $2050 on the $SPX, we have a short-term trend reversal. So with the bounce this Tuesday, $SPX `+2 percent, until I see the previous support, $2050, this is first resistance to watch in this oversold bounce. A break of the $2050 would be a reversal of the three day break. If the bulls are to take control, $2115 on the $SPX would be an upside target. At this stage I am  playing the overall trend to the downside,  but will be watching the resistance levels because they hold the key to the current downtrend. What is critical is that you are sizing any new position at the most ½ your normal size and manage all winners closely.

Have a great trading day.