NEW YORK (TheStreet) -- The Nasdaq 100, and all other stock indices, are ending multi-year up trends. The gap-island-reversal spotted yesterday should mark at least an end to the rally from the 2011 low, and eventually a return to the 2,500 (+/-500) zone; or about 45% lower from here.
There is a lot of stair-stepping down, then up, then down between here and this level, though, with the next big test not arriving until the lower yellow box is probed around the 4,100 (+/-50) zone, after the next small test comes with some probing around 4,350 (+/-50). Historically, some of the sharpest rallies show up as the corrective bounces within a series of declines. The telltale sign of a downtrend is the formation lower lows and lower highs, as our blue arrows anticipate (see below).
After Monday's action, a second set of gaps has been formed, creating a gap-island-reversal within another gap-island-reversal. This ominous occurrence makes the formation shown yesterday look small, as can be seen in this updated chart, by the two red ovals that now reside within the upper yellow box. The new formation has created three islands, rather than just the one created by last week's action.
Our Decision Support Engine's warning to exit all stocks upon a Nasdaq 100 close under 4,500 was not yet triggered Monday, as only 4512 was reached. However, the formation noted above suggests using any bounce this week to exit positions that are already in trouble, as the coming break of 4,500 should ignite an immediate flush toward 4,350. This could be seen this week, in fact, along with tests of Dow 17,100 (+/-100) and the S&P 500 2,010 (+/-30).
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.