When the market was in the midst of a vicious selloff last week, I commented to my Delta Report subscribers that the technical conditions had reached oversold levels that had only occurred (to my recollection anyway) two previous times in my 35-year career in the markets. Once was after the crash in 1987. The other time was in August 2011.

It makes sense, therefore, to go back and take a look at the market action following each of those previous two events in order to get an idea of what we may be in for this time around.

Take a look at this chart of the S&P 500 from 1987…

The S&P 500 collapsed 95 points during the 1987 crash. It took a couple of days for the market to claw its way higher and recover about 30% of the points lost.

Then the S&P fell back to retest its low. That retest was followed by another rally attempt that recovered 30% of the lost points. But the real bottom of the market didn’t happen until about six weeks later when the S&P made a slightly lower low.

Now, here’s the chart of the S&P 500 for 2011…

This time, the S&P 500 collapsed 220 points. It took about six days for a bounce to take hold and recover 30% of the points lost. Then, the market sold off and retested the lows. That retest was followed by an even stronger bounce attempt which recovered almost 50% of the decline. But the final bottom didn’t occur until early October – two months after the initial collapse. That’s when the S&P 500 made a slightly lower low.

The Volatility Index (VIX) stayed elevated during that entire two-month period in 2011. And, if my memory serves, the 1987 version of the VIX (which was structured differently back then) stayed quite elevated as well.

If we use these two examples as roadmaps, then we’re likely in for a six- to eight-week period of sustained volatility. The S&P 500 should retest last Thursday’s closing low (2581) a couple of times. And we should get some significant bounce attempts off of those retests.

As of mid-day yesterday, the S&P 500 had recovered about 50% of its decline. If history is any sort of a guide, then we’re pretty darn close to the end of this bounce.

Next week could be a bit rough.

Best regards and good trading,

Jeff Clark

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