This story was originally published on RealMoney on June 24 at 3:30 p.m. EDT.

As usual, analysts with no clue were scurrying about Thursday to explain the sharp selloff in stocks. The two easy culprits were oil as it surged (back) to the $60 level and all the hoopla over the Chinese yuan.

The only problem with these "causes" of the selloff is that they are both old news. Crude oil topped out on Monday. That's right, it was Monday when August crude oil breached the $60 level for the first time since April and hit $60.02. But what? Nobody cared then? On Monday it also scored its high close for the move. On Thursday it made a lower high, returning to $60, andthen closed well off the highs at $59.42. So what's all the fuss about? Or more to the point, why did $60 oil cause the market to stumble yesterday but not on Monday when the

S&P

closed less than a point off of Friday's multimonth highs?

If you are stumped, you are not the only one. This stuff is absurd. Oil prices have been running up all month while the market has rallied In fact, oil was up sharply last Friday (June 17) when the market closed at multimonth highs. But on Thursday, when crude (almost) returned toMonday's highs, it caused a selloff? Ridiculous.

How about worries over the value of the Chinese yuan and now all the jawboning on Capitol Hill about trade sanctions against China? Now that's news. How long has this been an issue? How about forever?

Now, let's look at some things that might have made a difference to stock prices over the past few days.

First and foremost was the business about the filling of that March 9 gap in the S&P that I highlighted in

Monday's column. No big deal, you say? Well, that March 9 gap was the only remaining overhead unfilled gap in the S&P going back three years. So maybe it did matter. It certainly looks like it did.

In Monday's column I noted that "the pattern that we saw on Friday has the potential of completing an upside move, at least for a while. Not only did the advance to new multimonth highs occur on record volume (at least in early trading when the new highs were achieved), but ittook place on a quarterly expiration that has in the past marked turning points for the market."

Below is that chart of the cash S&P, which shows where that gap fit into the current pattern, and how prices have turned back from there.

Cash S&P
The longer-term view

Click here for larger image.

Source: Harry Schiller, Lind-Waldock

As you can see from the chart above, the S&P had a date with the filling of that March 9 gap and that has been it on the upside. Now, the 1225.20 high in the September contract from last Friday not only defines a multimonth high, at the filling of that gap, it also marks the top of a near term triple-top pattern.

The VIX Gave Another Perfect Sell Signal

In addition to the filling of the last overhead gap, there was the excessive bullishness, and early this week the VIX gave two consecutive sell signals.

In Monday's column I noted that a new closing low in the VIX would add further to the strength of Friday's sell signal. On Tuesday the VIX complied, confirming last Friday's intraday low reading with a new closing low -- its lowest close since 1996. Then, on Wednesday, the VIX closed just .03 lower, which, according to our methodology, produced a second sell signalin just two days. On Wednesday, of course, the S&P made a new multimonth (intraday) high at 1219.59, eclipsing last Friday's high by just .09 before pulling back into the close. Now, just two days later, the S&P has dropped 22 points from Wednesday's multimonth high, the

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Dow

has dropped almost 300 points, and the

Nasdaq Composite

has dropped 48 points on an intraday basis(from Thursday morning's highs).

Now here's the funny part. On Wednesday, if you checked around, you could have heard the opposing view that the new low in the VIX "was bullish for the market." As you know, I couldn't disagree more.

Last Friday we got the new intraday low in the VIX, and then this week we got the new closing lows on both Tuesday and then Wednesday. Could this multiple sell signal have been any more clear?

Key Reversal

As if the market needed anything else to trigger a meltdown, yesterday (Thursday) the Nasdaq Composite turned down after making a multimonth high at the 2106 level -- a level which I had also given as important resistance in Monday's column. But this wasn't just any old reversal. It was a bearish key reversal (defined as a multimonth high, followed by a lower low than the day before, and a down close).

The shorter-term chart below hints at some support in the 1196-1197 level of the S&P futures. This is a probable downside target for this initial move. This level doesn't have to be seen, but it should be revisited before this decline runs its course. If this level is probed, I would expect a pretty good rebound to follow. In fact, maybe this level will mark the bottom to the current decline. Below this level is another support ledge at 1190, and if that gives way, then there is the real possibility of a return to the May 18 island reversal gap (which launched this advance) at the 1175 level of the cash S&P or 1180-ish in the September contract. I don't expect this level to be challenged anytime soon. But if so, it would be very bearish if it were to be breeched on the downside.

Near term, look for the market to find some initial support above the 1200 level of the S&P (futures) and bounce back up a bit. That initial bounce, however, is likely to fail, and another selling wave should follow -- probably to a lower low (maybe to the support at the 1196-1197 level), but not necessarily.

In the Nasdaq, where we had been seeing some signs of relative strength, I would again expect to see a return to the May 26 gap at the 2050 level. It doesn't have to happen right now, but this looks like a pretty good time for that gap to get filled. And if the S&P pulls back below the 1200 level, then it becomes a good probability. Here, as well, I figure any pullback to that gap at the 2050 level may mark a low -- at least for a tradeable rebound, maybe something more.

September S&P
Filling three gaps and collapsing

Click here for larger image.

Source: Harry Schiller, Lind-Waldock

Bottom line: There will be some further weakness over the near term, but figure the worst of the shakeout has already taken place. For now, I am not looking for anything much more severe than the usual correction, which will work off an excessively overbought and (especially) overbelieved condition.

If crude oil pops to even higher highs, then we will have another excuse for a further selloff. But ultimately all of that other stuff is just noise. The market is just going about its business of completing patterns and working off its recent excesses. Right now it is not quite done correcting the bullish excesses of the recent advance. But Thursday's shakeout went along way in that direction.

At the time of publication, Schiller was long Dow Jones funds, short S&P funds and short QQQQ puts, although holdings can change at any time.

Dr. Harry Schiller is owner and editor of the Short-Term Consensus Hotline. He is a stockbroker and Options Principal with brokersXpress, inc. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback;

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