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What’s next in the stock market after this big rout?

The selloff we just experienced exceeded all my expectations. I do not remember when I saw the market drop more than 3% in two consecutive days. It was amazing! Well, of course, if you forget, that it was your money on the table in this rout. It is also a never seen move action when the market saw two consecutive days losing over 3%. Never ever in history, this ever happened. What a move!

At the end of the day, the correction settled at 8.1% and VIX as max 29.7 level:

 
S&P corrections
 

This also makes it the shortest correction deeper than 6% in terms of the losses. If we stop here and start recovering, it would really be the shortest one. If we keep falling, we may see more days of selling.

What can we expect from here?

I expected a bounce from yesterday’s 3.45% selloff. The market bounced up for about 1% (futures) but at the cash open, it lost the steam quickly and sold off. The selling speed gained steam soon and before we knew it the market was down over 3% again. It went as low as 3.4% again and bounced of the lows to finish 3.05% down. Unimaginable!

Will the bounce happen then and where is the bottom of this first wave of selling?

For that, we may use a measured move practice again.

To find a potential bottom where we may expect the market to bounce, we take the market peak and measure the distance to 50 day MA. On the chart (see below) we identified the peak to be 3388 (remember, this is not an exact science, so an approximate number works well too). The 50 day MA level was at 3260. If we subtract the numbers, we get 128 points distance.

Take that number and project it down from the 50 day moving average: 3260 – 128 = 3132. So we may expect the market to drop to approx. 3132 level and see a bounce. Today, the market finished at that exact level (plus / minus).

Thus, I expect a bounce from here, possibly back to 3240 level which was the previous correction low support and also a long term support line. Then we will probably see another wave of selling. I expect it to drop a bit further and touch 200 day MA which, hopefully, will end this correction. From there, we may see a long way to recovery.

Of course, I may be wrong and selling may continue tomorrow and for the rest of the week. If so, it however, will be extremely rare. But again, no matter what happens, this is a great opportunity to be buying great companies at a nice discount.

For my measured move speculation, see the chart below:

 
S&P corrections
 





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