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) 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) 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 September high. The strength or weakness of the A/D numbers on the first strong rebound rally will tell us more. QQQ’s volume last week was, similar to SPY, higher than it was the previous week.

The Spyder Trust (SPY) triggered a weekly doji sell signal last week by closing below the prior week’s doji low of $466.23. SPY had a Monday high of $473.54 and came close to the daily starc+ band before closing below the daily starc- band on Friday.

The 38.2% support is at $455.52 with the September high just a bit lower at $454.05 (line a). The 50% support is at $449.95 with the rising 20-week EMA (not shown) at $447.78. This EMA was tested for several weeks in September before SPY bottomed out. The 61.8% Fibonacci support is at $444.38, but I think a further decline is likely to find support closer to the 50% support, in the $448-$450 area. With Friday’s close at $459.39 a decline to $448 would mean a decline of 2.5%. There is major support in the $429 area (line b) which is 9.7% below Friday’s close.

The daily S&P 500 A/D line bounced back to its WMA on Wednesday before plunging on Friday, when only 14% of the stocks closed higher. The A/D line has dropped below the September high (line c) and is close to the support from early October (line d). There is more important A/D support (line e) based on the July high, August low, and September-October trading range. The On Balance Volume (OBV) closed barely above its WMA on Friday, and is well above the support from early October (line f).

With these losses in the major averages, it is not surprising that the losses were over 3% in three of the eleven S&P sectors, led by a 3.5% decline in the Consumer Discretionary Select (XLY) XLY and followed by drops of 3.2% and 3.1% in Communications Services (XLC) XLC and Technology Sector (XLK) XLK . Even though the Energy Select (XLE) XLE was down 4% on Friday it was still up 1.7% for the week.

For the week, the S&P Growth Index ($IGX) was down 3.1% while the S&P Value Index ($IVX) was up 1.1%, which reversed the prior week’s gains. The technical outlook has not yet been changed, however, as the ratio of $IGX/$IVX still favors growth.

The declines in some individual stocks were much more severe on Friday, especially in some of the so-called ”reopening” stocks. The above four stocks were some of the weakest S&P 500 stocks, led by a 13.2% decline in Royal Caribbean RCL (RCL) and a drop of 11.4% in Norwegian Cruise NCLH (NCLH). Many airline stocks were also under pressure with American Airlines AAL (AAL) down 8.8%, while live entertainment company Live Nation (LYV) was down 9.1%.

So what’s next for the stock market?

Stocks are likely to be volatile with a downward bias over the next few weeks. It will likely take time for the market to form a bottom after last week’s selling, but while I would not count on a v-shaped bottom, it can’t be ruled out.

In the first quarter of 2022, I would expect stocks to be well above the closing levels from last Friday, but some stocks will do better than others between now and then. In evaluating new positions, I would concentrate on those stocks and ETFs that are outperforming the S&P 500. As for retirement funds, I would stick with the stock market, until there are signs that we have entered a bear market. Last week’s action may increase the growing skepticism of Wall Street strategists.