Here's What Happens if Stocks Go Lower This Week...

Great day on Wall Street yesterday! Markets didn’t lose one red cent. They didn’t make one either, but that’s a victory these days.

But while you were enjoying your three-day weekend, the rest of the world’s markets were lurching back into action. You might even notice some green on your screen today…

“Stocks rallied around the world, commodities jumped and credit markets strengthened as Chinese growth exceeded the most pessimistic analyst forecasts,” Bloomberg reports this morning.

Yes, the financial press is hot on the case – and desperately asking all the wrong questions. You might have noticed CNBC wasted no time squeezing in Markets in Turmoil programming early Monday morning. Even the perpetually wrong print dinosaur Time magazine is moving toward the finance side of the boat, predicting more pain in world markets. And a global recession to boot…

I warned you late last week – the market’s woes have quickly migrated from the finance page to the top story of your evening newscast. Everybody’s clutching their wallets and anxiously checking retirement accounts. Uncertainty’s everywhere.

But if there’s one thing that is certain, it’s that bad financial decisions will be made this month. And today we’re going to make sure you don’t make any…

It’s critical that we mind our P’s and Q’s during this bout of market instability. We have to keep our cool—and we must stay objective. Be on the lookout for traps like relief rallies that sputter and lead to the market headed even lower than before. And for the more subtle snares set by our own opinions—our reaction to the news and the kneejerk decisions of those around us.

We’ll obviously have to watch China. And oil. And the S&P. And everything in between. We need to see how investors react to big headlines. Volatility spikes and new market leadership could give us early signs that the worst is behind us. But more selling and strings of afternoon fades could tell a different story.

So what happens if we do go lower?

As I mentioned last week, the major averages are all 10% or more off their highs. That puts U.S. stocks firmly in a correction. And the small-cap Russell 2000 and the Dow Jones Transportation Average are both down 20%. That’s bear market territory, pal.

Turning to the charts, you can plainly see how the S&P 500 is teetering on the brink…

Giving it Back

You can see how last week’s drop inches the big board closer to its October 2014 lows. This could be big trouble if this level is breached. This fall we saw a failed go at new highs. Now we’re seeing market breadth continue to flash warnings signs…

We’ve documented countless times over the past few months how fewer and fewer stocks are participating in market rallies. Now the first downtrend in the NYSE Advance-Decline line has emerged since the bull market started seven years ago, famed technician John Murphy writes at Stockcharts.com. Add that to the pot of trouble this market’s been cooking…

“With foreign stocks in a bear market, U.S. stocks are in danger of following suit,” Murphy says. “Internal market measures show that the market is already much weaker than the major stock indexes. That also increases the odds that 2015 lows will be broken. If that happens, the S&P 500 could lose another 10-12% before reaching major support.”

I’ve said it before – you can complain about markets till you’re blue in the face. But the one thing you can’t do is fight them.

Follow your trading rules and you will survive. A lot of bad trades will be made this month. But if you have the discipline to keep your powder dry while most folks throw good money after bad, you’ll be just fine…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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