Saturday, October 11, 2008

TRYING TO FIND A BOUNCE? HERE'S WHAT YOU NEED TO KNOW

Another historic day to cap off another historic week. The last time we declined 8 days in a row were the days following Sept. 11, 2001. The DJIA lost 18.2% this week. The DJIA had a 1,018.77 point range and the S&P 500 had a 96.56 point range. Today marked the 1-year anniversary of the DJIA’s all-time high of 14,164.53. We are now down over 40% since that peak.

Today, the markets gapped down and dropped 7%, and it only took 7 minutes for the market to make a rebound to fill the opening gap. This was the largest morning gap down I’ve ever seen in a U.S. index. The volume level in the first hour was amazing and heavy and the volume in the last hour was equally amazing and heavy.

S&P 500 – 1 Day

Whenever the market hits a low in the morning that low is your first support level. I am pleased that the market held its low and made a higher low and broke out in the last hour. At around 10:30AM, one could see that the rally was weakening and the market was forming a bearish flag (which broke down). In the longer short-term picture, the market formed a descending triangle drifting lower throughout the day. The important key here is that we held our lows. The breakout occurred at around 3:00PM and the rally held onto most of its ground. The last 20 minutes represent current consolidation. It’s a positive thing that we closed down -128 points. Remember when a 100 point move was considered big and crazy? It’s peanuts now.

S&P 500 – 3 Day

The next three 6-month charts show several important technical aspects of today’s action. With the exception of the NASDAQ (the best performer), both the DJIA and SPX formed doji on massive volume. The doji are long-legged, signifying extreme indecision (confirmed by the 1,000 point range in the DJIA). Notice how volume it “back to normal” levels. We actually hit record volume today on the NASDAQ and SPX.

Next, notice the Bollinger bands. With the exception of the NASDAQ, today was the only day where a day gapped down so far that it opened below the lower band. Not only that, the day closed completely below the lower band as well.

Given the band width’s extremes, the massive record-setting volume, and the long-legged doji, I believe we are where we need to be to cal la bottom. I have started entering longs today. Since a bottom is tricky, it’s smart to gradually scale in positions instead of shooting your whole wad in the market all at once.




Below, the VIX set more records today by hitting a high of 76.94! Incredibly, this is the highest reading since the inception of the indicator, a testament to the true extent of our problems. As the market rallied, the VIX came off its highs and closed at 69.95. Although the day’s pattern is not considered a long-legged doji, the candle is a high-wave stick signifying major confusion. A single pattern isn’t as reliable for predicting a reversal, but 2 or more increase the odds. What I am looking for on Monday in the VIX:

1) The present pattern may be enough to start a reversal, but the signal is not clear

2) Bearish gap up, fade throughout the day to close well below it’s open

3) Doji, preferably long-legged

4) Bearish engulfing

The last three patterns put the odds of a major reversal close to 100%.

VIX – 1 Day

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3 comments:

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