A Massive Reversal or Long Live the Fed

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From Standard & Poor's Equity Research

2 billion shares and the price range that accompanied that large volume sits in the 1427 to 1504 range.

If we take volume out of the equation, the key chart resistance points are 1450/1460 and then 1490/1503. The 50-day exponential and 65-day exponential averages both sit at 1487. Some key Fibonacci retracement levels may also be an excuse for profit taking and could provide at least a short term ceiling for the S&P 500. The 38.2% retracement comes in at 1441, not far from the intraday high on Friday. The 50% retracement targets the 1463 level, while a 61.8% take back of the decline is at 1485.

The stock market tends to move in symmetrical waves, and while we are not Elliot Wave experts, we have noticed something interesting about the latest correction. The decline from the intraday high on July 19 to the intraday low on August 6 equaled 8.2%. The second wave down from the intraday high on Aug. 8 to the intraday low on Aug. 16 was almost the same at 8.8%. Scary!

During the last week, it was interesting that a couple of indexes did not break to new lows, but were successfully testing their Aug. 3 panic lows. The two that jump out are the S&P Financial SPDR (XLF) and the Russell 2000 (RUT). The XLF, which had peaked before many of the other indexes, saw a substantial decline of 15.7% from June 1 to the closing low on Aug. 3. However, while other indexes were falling below Aug. 3's panic low, the XLF held right at that low. While the XLF has not yet completed a reversal formation, it is very close to completing a nice double bottom.

The Russell 2000 has declined 12.2%, and along with the Financials, led the market lower, in our view. The RUT slightly undercut its Aug. 3 low by about 4 points, and we also consider this a successful test. Importantly, the pieces of the market that led the decline have actually been tracing out reversal patterns since the beginning of August.

We have seen some very dramatic sentiment readings of late, with some equaling or beating what we have seen during bear market lows. The CBOE equity-only put/call ratio hit 1.08 on Tuesday, the highest single-day reading since Aug. 6, 2004, and right near an important intermediate-term bottom. In addition, we have seen three straight days where the equity-only p/c has been greater than 1.0 for the first time since September 2002, right before the bear market low in October. High put/call ratios are a sign of fear, and from a contrarian view, eventually bullish for the stock market.

The CBOE total put/call ratio soared to 1.53 on Thursday, one of the highest all-time readings. This surge in the overall p/c ratio pushed the 30-day exponential average to 1.17, just slightly exceeding March's all-time high level. The 10-day p/c ratio is also very close to setting an all-time high.

Internally, things have gotten to historic proportions. The percentage of new NYSE lows hit an astonishing 32.8% on Thursday, almost equaling the 33.2% seen on Aug. 31, 1998, and right at the first major low during that bear market. The only other times when this level has exceeded 30% was just before the bear market low in 1990, on Oct. 19 and 20, 1987, and in September 1981. The 1981 occurrence represented an intermediate-term low, but not the bottom of the early 80s bear market. When we have seen new lows exceed 20% of issues traded in the past, we often times have a retest of the lows.

Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's .