How Low Will Stocks Go?

This year’s Black Friday was marked not by buying, but by selling, as overseas markets plunged in overnight trading Friday, with Japan’s Nikkei and Hong Kong’s Hang Seng down over 2.5%. The Spyder Trust (SPY)
, which tracks the S&P 500, opened down 1.4%, which in turn triggered even more selling in the European markets, with Germany’s Dax dropping 4.1%.

Typically in the U.S. the days before and after Thanksgiving have a low trading volume, which can amplify the price moves. Friday’s volume in SPY was the highest of the month, and 60% above the 30-day average.

The 2.53% decline in the Dow Jones Industrial Average was only the 3^rd worst Black Friday performance on record, falling behind only November 28, 1919 (down 3.56%) and November 27, 1931 (down 2.76%). For comparison, after the bear market bottom in 2009 from the 2007-08 financial crisis, the Dow dropped 1.48% on November 27, 2009.

The iShares Russell 2000 was hit the hardest last week, losing 4.2% and dropping back into the yearlong trading range. The Nasdaq 100 Index and SPDR Gold Trust were the next weakest, as each lost 3.3% for the week.

The S&P 500 was down 2.2%, a bit worse than the 2% decline in the Dow Jones Industrial Average, while the Dow Jones Utility Average was down 0.8%. The selling was very heavy on Friday, with just 469 issues advancing and 2857 declining for the day.

Even though stop-loss selling in a thin market likely contributed greatly to the extent of Friday’s decline, there was a fair amount of technical damage done. Both the weekly Nasdaq 100 and S&P 500 Advance/Decline lines are still positive, but last week was marked by plunges in the daily A/D lines across all major averages.

The Invesco QQQ Trust (QQQ)
, which tracks the Nasdaq 100, made a new high Monday at $408.71 before closing lower and forming a key reversal (point a). A key reversal is formed when a market opens above the prior high and then closes below the prior period’s low. They are consistent with a loss of upside momentum, but not necessarily a major decline.

The QQQ mostly held above the 20-day exponential moving average (EMA) for Tuesday and Wednesday before the news of the new variant of COVID-19 hit the markets before Friday’s open. The 38.2% Fibonacci retracement support is at $386.41, while the September high at $382.71 (line b) is 2.2% below last week’s close. There is chart support at $380 and the 50% support at $379.52, which in my view is the most likely downside target.

The daily Nasdaq 100 Advance/Decline Line closed below its weighted moving average (WMA), which has now started to flatten out. A declining WMA would suggest a deeper correction. There is converging support well below current levels (lines c and d), which goes back to the early…