By Nigam Arora
As the coronavirus spreads across the U.S., the question I am being most often asked is how low can the stock market go.
Let’s examine this question with the help of two charts.
Please click here for a long-term monthly chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.02% , which tracks the Dow /zigman2/quotes/210598065/realtime DJIA -0.07% . For the sake of transparency, this chart was previously published, and no changes have been made.
Please click here for a daily chart of S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.45% , which represents S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.48% . Even though many investors’ portfolios resemble the Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +1.47% , it is better to use a chart of SPY for the purpose of determining how low this stock market can go.
Note the following:
• Start out by carefully studying the first chart for a long-term perspective. Please read “The stock market’s big swings indicate a top or a bottom — here’s how to decide” and “As the stock market rallies, put protections on your investing portfolio.”
• The second chart shows the point at which a significant amount of pre-programmed selling by the machines may occur.
• There are likely many stops below the point marked “programmed selling” on the chart. If the stock market dips below this point, the selling may accelerate as stops get taken out.
• If the historical patterns hold true and there is no new unexpected news on coronavirus, the stock market may rally after the stops are taken out.
• Any programmed selling should be contained to the top major support zone shown on the first chart.
• The programmed selling point shown on the first chart is the top band of the support zone shown on the chart.
• If the market rallies from there, bulls would say that there was a successful retest. A successful retest will mean it’s time to buy for short-term trades.
• If the bottom band of the top support zone is broken, that will likely be a watershed moment.
• If the watershed moment occurs, the next major support zone is shown on the chart.
• The bottom band of the lower support zone band is where the Arora buy signal was given on Christmas Eve 2018, which turned out to be a great buying opportunity and the bottom of the dip.