The Dow Industrials broke down as long ago as Feb. 20, and it looked like any breakdowns might be confined to just those few stocks. But with Friday's new closing low on the S&P 500 and yesterday's massive sell-off with very wide breadth, it is clear that the near-term trend clearly supports lower prices.But how low?
Support zones just don't give a clear answer to that, since we must go back to 1996 before any support shows. Mid-year to mid-fall 1996 show a support zone for the Dow Industrials at 5,300 to 5,800 and the S&P 500 at 625 to 680. That is more than 12 years back and, since time takes away from accuracy, we will go to another source for our "guesstimate."
For that we go to Leonardo Fibonacci, 13th-century mathematician, for the answer.
Signor Fibonacci discovered that "key numbers" expressed in ratios occurred naturally and seemed to be expressed in virtually everything in the universe from snail shells to the diameter of the earth.
In stock market analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 60%, 61.8%, and 66.6%.
Measured from the last significant mega-market intraday low in December 1974 of Dow 570 to the intraday market top in October 2007, which was 14,280, the ratio analysis on the Dow works out like this:
• 60% = 6,054
• 61.8% = 5,808
• 66.6% = 5,150
But the analysis of possible market bottoms may not be as important now as the direction.
We've patiently waited for the market to speak and it has issued a clear sell signal. Even though there may be sharp rallies, the trend is down and those who ignore it will be sliced with the falling knife.
Keeping the trend in mind, the UltraShort MSCI Emerging Markets ProShares ETF (NYSE: EEV), my trade of the day, moves at a rate that's twice the inverse of the MSCI Emerging Markets Index (NYSE: EEM) and gives us a way to play this downtrend.
Sam Collins is a contributor to OptionsZone.com.
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