Stock-market plunge was still too orderly to mark a bottom, chart watchers says

A brutal close for equities on Wednesday appeared to set the stage for a Thursday rebound, but not all chart watchers are convinced the selloff accompanied the sort of purge that marks a market bottom.

“The key levels we look for internally once again failed to exhibit themselves in a meaningful way Wednesday. At this stage the market’s decline looks like a measured move, which would imply another 4% to‐5% downside, zeroing in on the lows from the correction earlier this year,” said technician Jeff deGraaf, chairman of Renaissance Macro Research, in a Thursday note.

See: The Wall Street analyst who called this stock-market rout sees another nasty drop for the S&P 500

In a selloff that accelerated sharply ahead of the closing bell, the S&P 500

SPX, +2.38%

 fell more than 3% on Wednesday for its sixth straight loss, while the Dow Jones Industrial Average

DJIA, +1.97%

 tumbled more than 600 points, or 2.4%, and the Nasdaq Composite

COMP, +3.47%

 was slammed 4.4% to push it into correction territory. The declines wiped out year-to-date gains for the S&P 500 and Dow, leaving both gauges negative for 2018.

Check out: Here’s a reminder that stock-market corrections don’t always become bear markets

Stocks were recouping a big chunk of those declines in a Thursday bounce.

DeGraaf pointed to a number of indicators that he argued have yet to show the sort of washout that helps set a low. The TRIN or Arms index, based on the advance-decline data, rose but had yet to signal a reversal, he said, while the ratio of advancers to decliners remained “way too orderly” (see chart below).

Put/call ratios — puts are options that give holders the right but not the obligation to sell at a certain strike price, while calls give holders the right but not the obligation to buy — also rose Wednesday, but selling was orderly and showed little sign of urgency, deGraaf said, counseling that he’d rather “exert patience and await a high probability event than exhibit capriciousness and get too cute.”

Counterpoint: The stock market’s technical indicators are suggesting ‘the bottom is in’

Some analysts were ready to argue that the low may at least be near.

Jeffrey Saut, chief investment strategist at Raymond James, said he was inundated with emails asking whether Tuesday’s session, which saw the S&P 500 fall below its Oct. 10 low, signaled an “undercut low” similar to the pattern seen in February that marked the bottom of the market’s early 2018 correction (see chart below).

The idea is that undercut lows eliminate “weaker holders, leaving more committed investors who create support for the stock’s new run,” Saut said in a Thursday note, but noted that to be certain an undercut low was in place, the S&P 500 would need to rally back to the 2,710 to 2,730 zone.

The other possibility, Saut said, is that the market is in around the 15th day of a “selling stampede” — a phenomenon that typically runs 17 to 25 sessions with only one- to -three-session countertrend moves.

While some stampedes have lasted 25 to 30 sessions, he wrote, it’s rare to see one run beyond 30 days. On a downbeat note, he noted that Raymond James’s short-term proprietary model has yet to cancel its Oct. 2 sell signal while it’s intermediate-term model now also registers a sell signal.

All in all, some caution remained in order, he said.

“After six straight down sessions for the S&P 500 index, a rabid rebound can occur at any time. However, stocks are in free fall — and it is extremely hazardous to try to catch a falling knife that is accelerating,” Saut wrote.

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