Trend Check with Tushar Chande

Downside Targets As Retest Resumes


Now that the market has resumed its sell-off, the retest of the February lows I was looking for seems to have arrived (see here and here).  What might be useful here is an estimate for down-side targets, so we can have some levels to anticipate.  Remember, the levels are just guesses, and could easily be ignored or overrun by the market.

Chart 1: The dashed red line is just around the February lows.  The two vertical lines help scale the initial drop and then a tool to project the second drop after the recovery highs.  So the support region starts at the February lows and projects past the 200-day simple moving average to 22,500. (See live chart here.)


Estimating Downside Targets

I used the a-b-c Elliott wave model as one possible way to estimate tentative downside targets. So in the $SPX chart I used the dashed vertical line to measure from the distance from the February highs to the February lows.  I then used the rebound high as the starting point to measure the second down leg.  So the assumption here is that the two down legs will  have the same amplitude.  Naturally, the market will do what it wishes, but we are just trying to set some down-side target for trading purposes.  In the case of the $SPX, it takes us below the 200-day simple moving average and down to the July-August highs.  So, in essence, we are using the February bottom as the first down-side target, and then looking for a potential overshoot range if the market continues to push lower.


Chart 2: The February low is the first down-side target, and the amplitude of the first down leg gives us a measure for the overshoot zone below the February lows at 2532. (See live chart here.)


$VIX Expands Above 17.5

I have been watching the $VIX 17.5 level, and after dipping  below that level last Friday, the market's volatility is above it again.  So the $VIX index gives another tool to look for market extremes during the sell-off.  Naturally, the previous highs, between 35-40 would be a decent upside target for the $VIX index.


Chart 3: The $VIX index is expanding again above the 17.5 level, and as with any chart, the 37.5-40 level should offer resistance. (See live chart here.)


Looking Ahead

The market technical internals are worsening as we go down to retest the lows.  In the broader technical picture, this is just a retest, despite the news headlines, but the headlines can cause an overshoot.  The basic model for the price evolution was laid out some time ago, and we should bear that in mind.


Chart 4: The basic template for this down-leg in prices was laid out a couple of weeks ago.


Thank you for looking in.  Just keep calm and trade on.  Perhaps even think long term!  I hope you will find the targets useful,  and will subscribe to the blog using the quick link below.



Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
Subscribe to Trend Check with Tushar Chande to be notified whenever a new post is added to this blog!
comments powered by Disqus