With the sell off in the stock market still unfinished, there is still a possibility, based on Fibonacci retracement lines, that the market may dip below 10,400. What’s more predictable though is that the uncertainty, after any major market low is reached, will be prolonged and it could drag well into late fall if not into 2012.
For example, last year’s market dip took approximately 2 months to consolidate a low, but also about that much to get the market to realize that indeed it is a low.
Going back little further, to the March 2009 lows which were a culmination of a 5 month long vicious sell off – and it took approximately 5 months to realize that indeed it is a major low.
Since then, bull market ran approximately 9 months before losing steam.
Another issue to consider is the viciousness of a sell off. The more drastic the longer it takes to consolidate and therefore longer for such low to be realized to be the bottom.
This current sell off has just begun and it is rather vicious which leads to believe that – while it is hard to predict where the lows are – the market is likely to go down into the 9,600 – 10,400 region on the Dow Index.
Just like in previous sell-offs, we would look for some price momentum divergence to see if we have these matching thick green lines going in an opposite trend in order to give a more confident buy signal.
This process could drag for a while with a huge probability that it will spill over into late September.
What is more worrisome though and may provide additional support to the belief that there is more to go down from here is this massive price-momentum divergence from circa December 2010 until last month (marked out in yellow lines). If we assume that similarly sized price space has to be carved out in the opposite direction, we may be in for a real nasty.
Of course, everything is subject to change if any new facts arise, particularly those out of Europe or if the European debt mess spills over into China.
On the more immediate basis and today’s rally going into Friday, the question is just how many are willing to hold stocks over the weekend and wait for an announcement before Asia opens?