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Remember yesterday's stock-market low point? We may see it again

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(Bloomberg Business) — If you haven’t memorized it yet, jot down this number: 1,867.01.

That was the lowest point in the Standard & Poor’s 500 Index during yesterday’s carnage, and many of the professional chart watchers out there believe there’s a good chance we’ll see it again even if China has refilled the punch bowl and everyone’s back out on the dance floor today. 

This is what’s known as a “retest” in the technical analyst lexicon. Dramatic and climactic selloffs like yesterday — where it seems like everyone’s throwing out the baby, the bath water, and the whole darn tub — are often followed by sharp recoveries. But just like a horror-movie villain that you think has been slain in the second act, you should know better.

It happened following the “flash crash” of 2010. 

And it happened again in 2011 when the U.S. government kissed goodbye to its AAA rating at Standard & Poor’s. 

Will it happen again? Let’s check with some of the brightest chart gazers out there. First up is Ari Wald, the head of technical analysis at Oppenheimer & Co. The good news? He’s optimistic. The bad news? The optimism is about his favorite NFL team — the glorious Philadelphia Eagles — and not about the market holding well above that low in the near term. 

“It should take more than a day to stabilize from an eight-month breakdown in trend,” he said today over e-mail. “A successfully tested base is important because it demonstrates that strong hands want to own a security at a particular level. The base develops simply as market participants with different mandates come to different conclusions at different times. At the end, strong hands win.” (He’s talking about investors with strong hands there, but same probably applies for da Birds.) 

Wald sees the market following the 2011 road map and expects a similar three-stage process: a high-intensity low like yesterday, followed by a relief rally, then another low point reached with lesser intensity. That low-intensity low would “be a sign that selling is abating, a base has sufficiently developed, and that the broad market is ready to inflect higher.”

Another thing analysts like this take note of are “gaps,” which are things that DeMarco Murray’s going to be happy to see in the Giants defensive line this year but not something stock traders should be happy to see on the tape. They refer to a market in which the opening print is noticeably lower than the previous day’s close, and we saw them during this recent plunge.  ”They indicate powerful selling and may act as resistance on the way back up,” Wald said. 

RBC Capital Markets technical analyst Robert Sluymer’s thinking is similar: “Beyond an oversold trading bounce, we will need to see some type of retest developing in the coming weeks before a case can be made that a more durable/investable low is taking hold,” he wrote to clients today. 

Or, as Brean Capital macro strategist Peter Tchir put it: “Do criminals and flash crashes always return to the scene of the crime?”

See also:

On the Third Hand: Why stock market turmoil could be a PPACA story

Stock trading in U.S. will pause if S&P 500 reaches 7 percent plunge