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Opinion: Stock market breakdown: How serious is it?

The stock market has finally broken down, as measured by the S&P 500 Index. On Tuesday, the index closed below support at 2,350. (On Thursday it was a few points lower than that.) Hence, the stock market has been shaken out of its slumber. This is a distinctly negative development, and we will now see if there is substantial follow-through.

The “modified Bollinger Band” sell signal is looking a little better now. Its target is the –4σ Band, which has now turned downward, and is currently at 2,324 and falling. The next traditional support level is at 2,300, so it is still possible that the mBB sell signal could be fulfilled (by touching the lower –4σ Band) and yet the S&P 500

SPX, -0.05%

 could hold above support at 2,300.

Not all of the indicators have fallen into a bearish mode. For example, there was heavy put buying on Tuesday, but the total put-call ratio was not above 1.00 for the day. Even so, both equity-only put-call ratios moved higher and solidified their sell signals. The standard ratio had already been moving higher at a pretty good rate, but now the weighted ratio has joined, too. It is above the previous levels that had represented 3-year lows, and that is significant in my opinion. These ratios are distinctly bearish.

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