A Lowry’s 90% Downside Day - Short-Term Update

Dear Readers:

I hope every one of you enjoyed your time off during the July 4^th weekend.  I personally did not touch my laptop for two straight days - which was quite an impressive feat for me.  After this brief time off, I now feel rejuvenated and ready to go.

But enough - the action of the stock market over the last trading days has certainly carried a few bearish implications.  Please keep in mind that trading the stock market is all about gauging the various probabilities and utilizing the best information available to you to make informed and unemotional decisions - certainly not an easy feat - but which still does not guarantee a profit.  For example, in my last commentary on June 24^th, I remarked that it was not a good time to short based on the fact that the DJIA broke out of its downtrend line.  At the time, the action of the market looked near-term bullish, and it could've killed any bear if they were not short the right stocks.  I, however, did not advocate initiating long positions en masse, since I personally don't like buying stocks in a market that has just broken out and which is already so overbought.

The breakout and the subsequent quick decline back below the downtrend line carried bearish implications, especially in an overbought market.  Please note the below chart is implying that there is further downside to go:

Now, I want to get back to the subject of this commentary.  There is a significant chance that a 90% downside day as defined by Lowry's has been signaled in the NASDAQ in today's trading.  For my readers who do not recall, a 90% downside day occurs when both the declining volume and the number of downside points equal or exceed 90% of the total volume and the total number of points, respectively.  A 90% downside day sometimes signals the beginning of a panic decline, or if the market is already oversold, further evidence of a very oversold market.  Generally, a significant market bottom is preceded by two or more number of 90% downside days.  A single 90% downside day like today may create an oversold situation in the short-term - one which would signal a temporary bottom - but with a number of intermediate term indicators (see below charts) still neutral or in an overbought situation, the chances of a bottom here is very low.  In fact, today's 90% downside day could be a signal for further panic declines down the road.

The lack of an oversold situation is also reflected in the VIX (no spike so far despite today's decline) and the fact that the unweighted S&P 500 Index and the S&P 600 actually made a new all-time high as recently as last week.  While there has been some decent selling on the NASDAQ, the amount of volume on the NYSE has been below average - which may be an indicator of potential further losses.  In the intermediate term, however, the author remains bullish - as both my liquidity and psychological indicators remain favorable and still show no signs of deteriorating.  ST (and still solid, although that could change in an instant) support levels remain a DJIA of 10,000 and a NASDAQ print of 1,900.

Signing off,

Henry K. To, CFA