What Happens to Stocks Now?

The market had a selloff these last couple of days, and the indices have dropped around 4%, so what can we expect to happen? Well first we can take a look at a few reasons why the market has finally given up on the lower supports.
First there is China. All the signs are pointing to a slowing economy in China. The stock market is plummeting, manufacturing is slowing. Commodity prices are slumping, and the Chinese government is doing everything in its power to prop the economy up. Second, there is the rest of the world. The rest of the world's economies are slumping as well. Interest rates are low everywhere, and the economies just aren't picking up. Third, the strong dollar is lowering international profits, and making US exports more expensive, drawing down demand for US products. Lastly, interest rates are looking to rise soon, so it may be smart to exit some stocks now, take as much profit as possible, and have cash ready to enter the bond market.
Fundamentally what does all this mean? Well, the US economy is going rather strong, compared to the rest of the world. Most international companies are taking hits because of all the reasons mentioned above. So, what you can look for are companies that are more closely tied to the US economy. Look for companies that are not affected too much by the dollar, and that do not have many international ties. Those are the companies I would expect to take smaller hits in this downturn. However, most stocks will probably take some sort of hit. When a downturn in the broad market occurs, people get scared and will exit their positions. So you will want to look at the technicals of the stock and wait for a clear sign that the price won't continue to fall.
Now lets take a look at the technicals of the market as a whole. We'll take a look at the S&P 500, the Dow, the Nasdaq Composite and the Russell 2000.

S&P 500

The S&P traveled sideways and ended the range with a symmetrical triangle and a subsequent drop. Normally, a symmetrical triangle is a continuation pattern of a trend. In fact, by definition, there is supposed to be a clear trend before the triangle forms in order for it to be considered this pattern. However, this was just to perfect of a setup to not pay attention to, and a lot of insight can be made from its formation. 

The blue lines are where the supports are. These are the levels where we would expect the price to fight a little before bouncing back up, or continuing the fall. So the price is right around a support at the moment, so we need to watch to see what the price will do. I think that the price will fall through this level and head towards the 1810 mark. 

The Dow

From this screen shot, you can see that the Dow has broken through a few supports and still has some room to keep going down before the next one. I think the index will keep falling into the 1600 area, before the price starts to fight the bears. This is partly because the same formations exist on the S&P 500, and both indexes have a support there.

Nasdaq Composite

The Nasdaq Composite does not  have many supports to, well, support it. If the price falls passed the 4550 level, were looking at a drop towards 4000. The Nasdaq Composite has diverged from the other two indices from the beginning of the year. If all the indices were to align again, we would be looking at a fall to around the 4200 mark.

Russell 2000

The Russell 2000 is a small cap index, that is very different from the other three indices. This one barely traded above it's two year range, and has now fallen back into it. Unfortunately we cannot see the volume for this index, but it almost looks like the RUT has topped out with a head and shoulders pattern. The head and shoulders is one of the most recognizable pattern, where there are three peaks. Two peaks are roughly the same height, the shoulders, and a middle taller peak, the head. This almost always leads to a reversal in trend, and it looks like it is doing that here. The RUT looks like it will fall to 1090, and once it gets there it will probably show some support. However, from there it could keep going down, or bounce back up, 

The Russell 2000 is full of small cap stocks, and these are the ones that we would expect to take less of a hit. However, after looking at the technicals, it does not look like they will be spared the selloff.
Conclusion
The stock market has finally done something exciting this year. The amount of volume that has been generated shows people trying to take their profits before price falls more. We can hope this will only be a correction, and not a full blown bear. However, as prices fall, it makes these companies cheap again. So now it is time to watch, wait for a bottom, and buy the climb back up.

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