Today’s selloff marked the fourth Down Friday/Down Monday of 2016. The combination of a Down Friday* followed by a Down Monday** has been a consistently ominous warning.
Since January 1, 2000 through todays close there have 172 DJIA Down Friday/Down Mondays (DF/DM). From DJIA’s closing high within the next 7 calendar days to its closing low in the following 90 calendar days, DJIA has declined 166 times with an average loss of 7.5%. Declines following the DF/DM were greater in bear market years and milder in bull market years (see page 80 of Stock Trader’s Almanac 2016). The five times when DJIA did not decline within 90 calendar days after were October 16, 2002; May 29, 2003; February 12, 2014 and October 22, 2014.
When DJIA’s close on Monday of the DF/DM is used as the starting point of the subsequent decline (a lower price), DJIA has declined an average of 6.1% over the next 90 calendar days, but there were 27 times when no further decline occurred. In the May 16 chart, the 30 trading days before and 60 trading days after a DJIA DF/DM have been plotted alongside the 5 times there was no low after the subsequent high and the 27 times there was no lower low after Monday.
Based upon this graph, if DJIA recovers the losses from the DF/DM within about 4-7 trading days, then the DF/DM quite likely was an interim bottom. However, if DJIA is at about the same level or lower then additional losses are more likely. Current technical indicators and chart patterns also show a market on the brink of a breakdown.
Notated with red arrows in the chart below, the S&P 500 is currently sitting at the junction of its monthly pivot point (blue dotted line) and its 50-day moving average (pink line), which also coincides with the last two major selloff points in December and August 2015, plus a whole bunch of other support points along the solid blue line of today’s close. Stochastics, Relative strength and MACD provide little solace. All three point lower with MACD turning negative today.
*Friday or the last trading day of the week. **Monday or the first trading day of the next week.
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