second leg down

The first leg down from the May 22 top in the US stock market started with Bernanke's testimony before congress. It looks like the second leg down started yesterday with Bernanke's press conference which followed yesterday's Fed policy announcement.

The top chart is an hourly bar chart of the cash S&P 500. The drop from yesterday's high broke the rising trend line from the November 2012 low. If the drop from yesterday's high equals the length of the first leg down (red rectangles) it will end near 1570 or so. It is worth noticing that the 2007 high in the cash S&P was 1576 while the 2000 high was 1553. Old tops like these typically act as support on the way down. Averaging them we get 1565, not far from the repetition support level.

Even if this drop goes further than I expect the worst I think we would see on the downside is about 1510 which represents the halfway retracement of the move up from the November 2012 low to the May 2013 top. In any case my current view is that from whatever low we see the S&P will turn up and move to new bull market highs above the May 22 top.

When the  market is establishing its upcoming low I think there will be clues visible on the lower two charts.

The bottom chart shows the 5 day moving average of the CBOE equity put-call ratio. By the time the drop from the May 22 low ends I expect to see this moving average above the blue trend line and probably above the high which was made in April 2013.

The middle chart shows the 10 day moving average of the daily number of advancing issues on the New York Stock Exchange. I think it is likely that some sort of bullish divergence will be visible in this indicator at the low - i.e. it will make its low several days before the low in the cash S&P.