SPY - How Bad is it?

Welcome back Active Traders and Wealth Builders.

Long bull markets with periods of low volatility tend to lull us into false sense of security.  This past week's carnage in the financial markets is a healthy reminder that stocks can and do go down.

The weekend gives us a chance to step back and put the declines into perspective.  So let's take a look at the biggest declines in the SPY in the past 15 years.  To this, I used a weekly chart of the SPY and the excellent trend line tool in Thinkorswim to build the following table showing the declines greater than 12% since the year 2000

Start	End	Weeks	Pct Decline	Angle
4/2000	10/2002	136	-50%	-71 Deg
10/2008	3/2009	76	-57%	-84 Deg
4/2010	7/2010	10	-16%	-83 Deg
5/2011	10/2011	23	-21%	-82 Deg

The angle of the decline is important since it shows the steepness of the move.  Just for sake of comparison, I took a look at the angle of the upward move off the lows of 2008 to the recent high and found in increased at about 66 degrees.  That is some solid evidence that stocks go down faster than they go up.

Now let's look at a table of the current decline assuming it ends now - which I don't think it will.

Start	End	Weeks	Pct Decline	Angle
5/2015	8/2015	10	-7.5%	-66 Deg

To put it into perspective, we have not yet declined even 10% from the recent high in SPY!  So I expect we have further to go to the downside before we find some support.  How much further you may ask?  Let's take a look at voodoo to concoct a few likely scenarios, along with some advice as to how to play it.

The chart above shows a weekly chart of the SPY.  The lowest red line on the chart is the 161% move off the lows of 2008 at about 155 on the SPY which also corresponds to the highs set in March of 2000 and September of 2007.

Most of the meaningful declines since 2008 cross 3 voodoo boundaries before finding support.   If that plays out in this case,  I expect we will find support at about 188 on the SPY which is the green line just south of 190 on the chart.   That would be about a 12% pullback which is about another 4.5% to the downside from Friday's close.

As to how to play it, here is my advice:

1) Don't sell into a panic

For those of us who are careful with our money, the dollar losses is these moves can be staggering. Its easy to panic and sell at the worst possible time.  Don't let the dollar figures freak you out.  Instead, turn off the monitor, go for a walk and look at the big picture.

2) Don't buy the first dip

If you were looking a buying a great stock like Facebook, you might be tempted to jump in early in the decline and pick it up a bargain prices, right?  Don't fall for this, you will probably get a better entry later, see #3.

3) Stay on the sidelines and wait for it!

Don't base any buying decisions on a single day's action.  You won't pick the bottom since they typically occur on large one-day capitulation-type moves to the downside.  Instead wait for a few days confirmation that the market has found its footing before changing to a bullish mindset. Remember bottoms take time to form and don't try to be a hero and pick the bottom, particularly this early in a decline.

Seasonally speaking, the odds of a decline being over don't occur until the 3rd week of October. So I expect we are relatively early in this bear cycle.

A much better play from here is to wait for a rip-the-shorts-heads-off rally up the breakdown point at 200 in the SPY before entering some bearish positions.

4) Look at the bigger picture

Pull up a weekly or monthly chart to see how far we have come off the bottom.  This decline is not that bad and I expect it will get worse before it gets better.  So keep your powder dry, and cash on the sidelines, because I expect you will get a better entry point in the future.

Have a great week ahead.