Wall Street looks for a ‘W’ to signal the selling is done

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Talking about stock market fundamentals seems to be a giant waste of time these days.

Did the market really dive on Wednesday because everyone suddenly woke up to the reality of a sinking economy? What -- they didn’t know?

Was there yet another bad reaction to the bank bailout plan -- after three days of mostly favorable reaction, as shown in rising financial stocks?

Is anything pushing stocks other than minute-to-minute sentiment shifts that cascade with the help of automated trading and with forced selling by fund managers desperate to raise cash?

Here’s one thing we can say for sure about Wednesday’s vicious decline: Most major indexes didn’t break through the multiyear lows they reached late last week, although they got very close.

Who cares? Well, if the fundamentals don’t matter at the moment, we may as well look to the chartists, or market technicians, for clues as to when this nightmarish decline will end, or at least when it will take an extended break.

The chart-watchers say the pattern here is critical: They’re looking for the market to ‘retest’ last week’s lows, and either hold above them, or drop 5% to 10% below them -- and then bounce.

That would begin to trace out a ‘W’ pattern, although the right ‘V’ of the W might extend lower than the left V.

A lower right V already is guaranteed with the Nasdaq composite index, which plunged 8.5% to 1,628.33 on Wednesday, falling 1% below last Thursday’s closing low of 1,645.12.

The Dow Jones industrials, by contrast, sank 7.9% to 8,577.91 on Wednesday, but held 1.5% above Friday’s five-year closing low of 8,451.19. The Standard & Poor’s 500 and other broader indexes also closed slightly above their lows of late last week.

Phil Roth, veteran technician at Miller, Tabak & Co. in New York, believes the market so far is ‘following the script’ for a classic retest of the lows reached amid last week’s climactic selling. He thinks the Dow and other indexes might drop as much as 10% more from here, but then expects the selling to finally exhaust itself, leading to several months of a modest recovery in share prices.

Chartists don’t worry about why a selling binge ends. They just look for the price and volume action in stocks to tell them that the selling has run out of gas.

Richard Sparks, an analyst at Schaeffer’s Investment Research in Cincinnati, also has been expecting a retest of Friday’s lows, then a bounce, to confirm that the market collapse had run its course for the time being.

‘We needed to retest,’ Sparks said. But he said that the classic W pattern usually a takes a month or two to play out. ‘I didn’t expect it to happen in three days.’

But then, volatility in share prices has been manic for months, of course. ‘Things are happening in double-time or triple-time now,’ Sparks noted.

The risk, obviously, is that the market sinks through the Friday lows and just keeps going. Instead of a W pattern, we get something that looks like a lengthening lightning bolt heading for chart regions that haven’t been visited in more than five years.

All that the chartists could tell us at that point is that, nope, the sellers weren’t done, after all. At least it would be an honest explanation.