$SPY – The drop too far, too fast?

The market took a plunge today and all the why-did-it-happen pundits are citing the Chinese coronavirus fears for the sell-off.

Once again, this is news arriving to confirm what’s already happened. The NYSI, measuring long-term breadth on the New York Stock Exchange, turned negative last week. That was the tell that the market’s advance was faltering. News can accelerate a decline, but no-news would have also but probably at a slower pace.

What we have now is a fast fall and based on one of my key charts it is likely too far, too fast. See the chart of SPY below and note nearly every time the average SPY pull-back (as displayed as a histogram) pierces one of lower green lines, it bounces, and sometimes runs. The Nasdaq Composite chart is showing the same pattern.

In addition, 45 of the stocks on my nifty-50 stock list are on sells and 23 are oversold. Forty or more on sells is usually the bottom or the beginning of a bottom of a down swing.

Although today looked relatively ominous, not a lot of damage has been done – most of my bellwether stocks are only down two to three or so percent since the NYSI down turn.

So what’s next?

I think the market bounces tomorrow. The question for the week is will it be a dead cat? Or will it, in this bull market, be the start of another run to the highs?

If it turns out it’s no more than a dead cat bounce, or the market doesn’t bounce and keeps on going right down without pause, then the damage to the stocks and indexes not done yet will be done on the next plunge.

For now, as laid out in the post below the long VIX ETFs and ETNs are the play on this drop. Stops should be tightened to preserve the quick profits on TVIX (29.9%) and UVXY (22.7%). If the market weakness continues, TVIX and UVXY will no doubt be easy swing trades to jump into and out of going forward.

(click on the chart for a larger view)

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