As the stock market fell further to begin the week, traders face a precarious environment.

“In terms of a bearish setup, it could not be more ideal… bear trend, bear momentum, and structural bearish breaks of support,” said Sam Shames, Vice President of Options at Simpler Trading.

More economic data reports will be released this week, U.S. central bank officials are speaking at various events, foreign central banks have uniformly raised interest rates, and stock market participants are acting more jittery than ever.

Markets continue downward spiral

In the market today, all three major indexes were sharply choppy throughout the trading session with the Dow down at one time by 350 points.

The Dow closed at 29,260.81 points to fall 1.11% (dropping 329.60 points on the day). The Nasdaq dropped to 10,802.92 points for a .60% tumble while the S&P 500 crumbled 1.03% to 3,655.04 points – below its low in mid-June.

Sam reiterated the precarious nature of this stock market.

“Many things are sitting on ‘price ledges’ meaning that any breaks lower will not find support where you think they will,” Sam said. “There are open chasms under many of these ledges of support. This is an ideal setup for a genuine crash.”

Sam is closely watching the “fear” index and price across the board.

The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) spiked by more than 5% on Monday, hitting 31.50 heading into the final hour of trading. The VIX index anticipates market volatility over the next 30 days. 

The VVIX – essentially the fear index of the fear index that measures volatility of price in the VIX – spiked to 109.93 (a rise of 8.25% into the final hour). Both fear indexes were higher for consecutive days of stock market losses going back to last week.

“If both (fear indexes) get above 27 on consecutive daily closes and VVIX above 95 also on consecutive daily closes, that increases the probability of a crash considerably,” Sam stated.

The “heart” of the Nasdaq also continues to suffer under market losses.

“The market continues ‘shooting the generals’ meaning that the once invincible mega cap tech stocks are getting hit, too,” Sam pointed out.

Sam refers to FAANG stocks as the generals in the stock market – key technology stocks that are significant players in all three major indexes. FAANG stocks refer to high valuation technology companies that include Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). All FAANG stocks were down today.

More signals show rough waters ahead in market

Traders need to be aware of the various signals that indicate ever-increasing market uncertainty.

“The yield curve continues to be in deep inversion which is the strongest market generated signal that something big is coming,” Sam said.

The inverted yield curve means interest rates have flipped with short-term bonds paying a higher interest rate than long-term bonds, particularly the two-year and 10-year bonds comparison.

Banks have trouble making money when the yield curve is inverted. The situation is similar to buying pints of ice cream for $2 and selling them for $1 – it’s a losing offer.

No one knows what big event might upset the market because there are so many market-influencing catalysts throughout the world, i.e. economic woes, inflation, political turmoil.

“One thing I can say with some confidence is that whatever it is, it will be something that affects everyone, something that the ‘common man or woman’ on the street will understand,” Sam said. “It will be a historical event, not a financial event.”

There are no guarantees that these signals play out to a disastrous level, but common indicators have been tracked through the history of the stock market that precede worldwide events.