Last weekend I noted that I wasn’t seeing the extreme levels of bearishness on the Twitter stream for the S&P 500 Index (SPX) that I’d expect with the size of the price decline. As a result, I expected to see a bit more decline before a low was made. Now I’m starting to see some signs of fear and capitulation. As a result, I’m looking for a short term low in the near future. The first sign of capitulation comes from 7 day momentum. It is now painting the most oversold reading in three years.
The next thing I’m seeing is a lot of tweets calling for lower prices. Traders are now showing some real fear. Price targets for SPX are mostly in a range from 1700 to 1950, with the largest number at 1820. The tweets calling for 1820 come from multiple trading styles. I’m seeing Elliott Wave, trend lines, Fibonacci retracements, the October 2014 lows, etc. as a reason for the price target. The various styles add weight to that level as major support. A lot of buyers will take a chance at that level…but abandon their positions quickly if it can’t hold.
It is a time to be cautious, because major support (and resistance) levels often act as a magnet. I wouldn’t be surprised to see a quick flush to 1820 if yesterday’s lows break.