With that said, the astute investor will be looking for points to put capital to work.
There are two support areas ahead that will tell us the scale of malicious intent brought forth by this current correction. I outlined the support areas for both the Dow and Nasdaq 100 in this weekend's review, but thought that it needed to be articulated further.
Let's look at Nasdaq 100 first. As I write this note, Dow futures are down over 100 points. If this trend down continues to the market open we should see a gap down below the red trajectory highlighted in the chart below. The ideal situation at that point would be for a steep reversal to take place, closing above the trajectory. Basically, stock market bulls don't want to see a close below 4,150 on the NDX.
click chart to enlarge
NASDAQ 100
Should the NDX give way, the next obvious and absolutely critical point of support becomes Dow 16,000. And not simply because it's an attractive round number. It carries with it one of the key trajectory points for this bull market. The trajectory goes back all the way into the 1920s, carrying with it a great deal of weight. A touch of this trajectory, followed by a steep reversal back up would be as bullish an indicator for a fall rally as anything. A convincing thrust down below this trajectory sets the markets up for another 7-8 percent on the downside. So 16,000 on the Dow is a big deal.
DOW
There are a ton of sentiment indicators out there that are flashing some pretty extreme readings. However, it should be noted that steep declines in the markets do occur on extreme bearish sentiment paired with oversold readings, as we have now. In fact, the August 2011 pullback caused by the Euro crisis occurred with extreme bearish sentiment paired with oversold conditions. That one didn't put in its final bottom until October.
If catching market bottoms was as simple as buying whenever the put/call reached X number or AAII bullish sentiment went below X, then 95% of hedge funds wouldn't be underperforming their benchmark over the past few years. This is art, not science.
