There are a bunch of indicators already at contrarian extremes and they would argue that stocks are close to a low. Here, ISEE put call, daily sentiment index and CBOE put call:
Sources: Contrahour, Chad Gassaway, Stockcharts
Then there are others which have either not washed out sufficiently yet or at levels whereby we might argue ‘done’ if just a bull market correction or ‘just getting started’ if we are now in a bear market. Here, Investors Intelligence sentiment, AAII sentiment, SP500 new highs new lows, NAAIM manager exposure, volatility, and the Arms index.
Sources: Yardeni, Stockcharts
If we consider the 5% decline across the last two days of last week, it suggests we are in the territory of a nastier correction or bear market.
Source: Ryan Detrick
Additionally, Friday was a major distribution day and one of four recent such events. Major distribution days near the highs are a typical sign of a market peak. On the chart below, green above the line = major accumulation days (none in the last 6 months), red above the line = major distribution days.
If we look at the SP500 chart we can see that the steepness of the declines of last week does not resemble the v-corrections of the last 2 years. It looks more like the crash of August 2011 (also preceded by both an arching over in price and divergence in breadth), but notably without the volume spike that may signal a bottom yet.
The heaviest falls in August 2011 took place on Monday 8th. Ditto Black Monday in 1987. The reasoning is that investors have time to stew over the weekend and rush for the exits on Monday morning. Typically stocks crash from oversold overbearish conditions, not from highs. So we have a similar set up here for tomorrow (CPC, daily sentiment, RSI all at oversold, overbearish), and a major down day is possible.
Source: Mark Minervi
Closing at the lows on Friday makes it more likely that we will open to further selling tomorrow. The question is whether buyers now step in and that can be turned into a reversal or consolidation day, which is also possible.
In short, certain indicators suggest a bounce should be near. But the steepness of the declines and the bigger picture of the (likely) bear market suggest that we could drop further and trigger the more neutral indicators to greater extremes before a bounce. I suggest the best all round fit here is that we fall hard at the start of this coming week and then get a bounce soon but from significantly lower levels. I suggest a bounce is more likely on a high volume intraday reversal hammer candle and a bottom more likely to hold if it shapes out as a lower low on positive divergences. Both are absent so far.
Here is 2011 for reference. Note we saw higher fear spikes than we currently have, two long tailed intraday voluminous reversals and two lower/twin lows on positive divergences.