Gunn has been monitoring the price action over the past few weeks, using what’s known as the Elliott Wave Principle. That technique measures alternating patterns in stock prices to help predict investor behavior.
Just a few weeks ago, Gunn issued an “orange alert” on stocks, noting that the price action had begun to eerily resemble patterns seen just prior to the historic 1987 stock market crash. Citigroup analyst Tom Fitzpatrick pointed the same patterns out earlier this week as well.
“With the US stock market selling off aggressively on 11 October, we now issue a RED ALERT. The fall was broad-based and the Traders Index (TRIN) showed intense selling pressure as the market moved to the lows of the day. The VIX index, a barometer of nervousness, has been making a series of higher lows since August.”
The analyst warned that if Dow Jones Industrial Average falls below 17,992, or if the S&P 500 plunges under 2,116, that a major pullback would likely follow. At last check, those indexes were thankfully at 18,169.54 and 2,142.01, respectively.
“As long as those levels remain intact, the bulls still have a slight hope,” wrote Gunn. “But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast. The possibility of a severe fall in the stock market is now very high.”
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) rose $0.20 (+0.11%) to $181.40 per share in Wednesday afternoon trading. Year-to-date, the only ETF that tracks the DJIA has risen 4.35%.