DrBob - TA Update 1/20/2008
The Spx has broken down badly below the 1370-1390 support level and implies that we are in a bear market now as we have made a decidedly lower low, along with Dow Theory's signal. It seems that we have a broadening top formation and will continue to see a series of lower highs and lower lows.
The Russell 2000 and some other indices already have declined over 20%, a definition of a bear mkt. The Dow and Spx have held up a little better but the daily and weekly charts on those two and the Nasdaq are indicative of a downtrend.
The market is oversold but has been oversold for the last Spx 100 pts down.
To increase the chances of a tradeable bottom, one needs to see either a double bottom (at a lower level than where we are now) with bullish divergences, or a selling climax, which by definition has the 90% rule and an intra-day bullish reversal on very heavy volume.
Due to the lack of the uptick rule for shorting and elimination of trading curbs, a panic selloff could mean the Dow down over 500 pts and the Spx down over 50 pts.
The downgrade for Ambac could trigger a selloff in open exchanges on Monday and in the U.S. when it resumes trading on Tuesday.
In any event, it seems that the next 50-75 point move could be down in the Spx, and if we see down days without capitulation, then it could be more severe than that.
The VIX probably needs to spike up to the mid-30's at a minimum for capitulation. Sentiment is also not yet indicating a bottom yet.
Crude oil, gold and most commodities are also vulnerable as almost all assets are being sold. Only bonds have strength.
A market crash is more possible now than ever. The Feds need to intervene with a sharp rate cut of at least 75 basis points and immmediately so, to avert a crash, in my opinion.
Hopefully most investors have raised cash and become at least somewhat defensive in the past week or two.
Bear markets have sharp rallies but it is difficult to "catch a falling knife." Bear markets can be parabolic to the downside for a long time.
If we can attain a capitulation/tradeable bottom, then only very high relative strength stocks should be considered.
If we just drift lower without capitulation/panic selling, then all bounces will fail, if history is any guide.
Bernanke needs to take strong action on Tuesday or on any sharply down day this week to avert a crash. I am being redundant intentionally.
Let's hope he knows what to do.
regards,
drbob
