It seems the markets would have to come down quite a bit for PE levels to reach levels that would make stocks more attractive. If that is correct how far would the Nasdaq, Dow, and S&P 500 have to come down?

It is hard to pick bottoms in terms of an absolute number. That is one of the things that gave technical analysis a bad name (e.g., the Dow will be at 11,323.73 on February 4, 2003). One thing to remember when looking at P/E levels: it is not just price but earnings. If you look just at price without earnings growth, the drop would have to be much more significant that it most likely will be. When earnings start to improve you automatically have a better ratio. In terms of average P/E’s, Sir John Templeton says the market is twice as expensive as it has been in the past, and he takes that to mean there is a lot more grinding to go through.

On the charts we can look for general levels of support (points where historically the indexes have held), points where the ‘froth’ from the massive run up is completely taken out, or the completion of bearish patterns. In some historical scenarios the entire move up had to be wiped clean. What that means is not just the last spurt higher, but the entire gain from the start of the run. Look at a weekly chart of the Dow back to 1987. It more than doubled from the low of 1987 to 1994. Then it took off on a 45 degree run that put it over 11,000 in 5 years. Wiping away that gain would put the Dow at 4,000. The Dow has not really suffered a bear market, and in that respect it is vulnerable. As some analysts have noted, the Dow is still in a bull run, still in a long term uptrend. It was in the best shape of the big indexes until this recent breakdown. That has opened the door lower. It could retest 9000 (1998 highs) and even 8000 without too much selling in terms of its long term chart.