Classic. We go on vacation and the market tanks. But so it goes. Last weekend I suggested markets are faced with make or break time:

So bottom line: Bulls NEED a rally this OPEX. Most likely they will also NEED new highs on the $SPX or risk another lower high put in place and that may technically be a big no no.

Why? Because volatility remains dearth and highly complacent. And it is the $VIX that is sending a larger message to bulls: Something’s brewing and the game of low volatility may come to a sudden end sooner than most think.

Well, we have our answer. Markets broke heavily to the downside and actually printed some technical signals that suggest a correction far worse than the actual headline numbers show and that may indeed present an opportunity, but also raises major red flags.

The extent of the damage: Europe wiped with the #DAX down 20%, $DJIA down 10%, the $NDX wiping out 5 months of gains in the course of a few days, the $SPX down 7.5% off the highs.

In the macro context we finally got the MA reconnect I’ve been suggesting back in June:

$SPX: This next quarter may see a test of the weekly 100MA. Last visit was in 2012. It’s overdue & would be healthy. pic.twitter.com/JvHEP66vFq

— Northy (@NorthmanTrader) June 16, 2015

And here’s the chart now:

A couple of points to highlight:

The $SPX closed within 10 handles of that MA. However note a swift rally from here could print a reconnect after the fact, although a direct hit would be technically cleaner. This suggests further downside is possible if not likely.

As I suggested in June this MA reconnect was way overdue. Back in 1998 the initial bounce was met with a MA reconnect rally before making new lows which printed a positive RSI divergence and then produced a blowoff topping move into 2000. A similar scenario could certainly unfold here. The similarity in structure is striking and if you are bullishly inclined a bounce from here could mark the launching point for a major blow-off rally to come.

Bulls however are on notice: They need to recapture their monthly MAs, in fact markets are so disconnected from all key MAs that a bounce snap back rally is likely to occur in the next 12-48 hours:

Note we are now further below the daily Bollinger bands than in many years and the fact that the last 2 days closed at the lows suggests extremely heavy selling. Unusual quite frankly as the weekly $VIX usually sees a reversal into a weekend. Not this time:

The $DJIA was leading the downside as of late despite magic OPEX rallies, but it finally cracked with no hint of any OPEX magic:

But magic is what’s needed as key trend lines are breaking and have broken. The $SPX is now down for the year yet Wall Street’s targets are much, much higher:

The 1998 case suggests that new highs are still possible though. So bears can’t declare victory quite yet. Far from it, however technical signals suggest the selling was historically significant:

For example the participation index matched the all time lows of 2010:

And high lows, so far, are lower than even 2008/09:

And stocks below their 200MA are printing a lower number than even in October 2014:

And the $TRIN highlights that there’s real fear in the system:

There is MA support across the board here not only on the weekly MA front but also on the monthly:

Yet there was real fear on Friday and fear can turn into panic and one must be mindful of that as the downside can always accelerate further than most expect.

And so once again markets find themselves at the mercy of what central banks may do next. The Fed appears to be failing the confidence test with their muddled rate hike communication strategy leaving markets utterly confused.

There are 6 trading days left in the month and bulls are on the hook to do some saving:

Their first task: Getting that $VIX below 25, ideally below 20, or this inverse structure looks to wreck havoc on this now tested bull market. Folks, this a breakout:

So the challenge is clear: Back below the trend line for the $VIX or this market may turn into a valley of tears. How many tears?

A look at just basic Fib retraces back to the 2009 lows highlights the potential size of the playground:

That’s a lot of empty space below and as the chart clearly shows another rescue mission is in order and herein lies the principle proof in the pudding so to speak. Can markets make sustainable highs without central bank intervention? While markets made temporary new highs this year, surely spurred on by European QE and over 50 goal rate cuts, the evidence is completely lacking that markets can make sustained highs without the crutch of central banks:

The $DJIA versus $FED action. Pretty self-explanatory. pic.twitter.com/5xogAEAI5w

— Northy (@NorthmanTrader) August 22, 2015

And now Janet Yellen wants to raise rates? Surely you jest.

No, it’s clear bulls need a 1998 repeat or this market is in serious corrective mode. We will know more once markets invariable retest their broken MAs.

Additional technical charts here.