Prolonging the Panic

Todays market action is within the parameters I would expect under the current panic conditions. The markets are moving almost entirely on emotion and therefore somewhat unpredictable in their behavior.

While the technical indicators are oversold, they are also well outside of the normal ranges indicating that one should be careful about looking for a bottom too soon. The urge to sell, either just to escape or to scalp, is stopping any attempts to rally and work off the oversold condition.

Eventually the markets will turn higher here but it may take another day or two of behavior like we saw today before this occurs. No need to be a hero.

SPX 65 minute (6 bars per day) Click to enlarge

SPX Daily Click to enlarge

MCO for 10/7/08 Click to enlarge

Grrrrrasch

There was nothing nice about todays market except for the rebound near the close.

All the indicators are oversold enough for a bounce or more crashing. This makes prediction about as good as flipping a coin.

My gut reaction is that Monday Oct 6 was some kind of a significant low and that we could bounce Tuesday.

It is possible that on Tuesday we may start off going a bit lower intraday, but a number of my near term price targets have been met and a bounce could occur if there is no negative news overnight. The charts below are what an unstable market looks like, IRA investors should remain on the sidelines.

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New low swamped everything else in what looks more and more like climatic behavior.
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Walking in the Woods

Watching out for the bear, for the next few days the markets will be almost exclusively news driven.

The psychology among the players in the financial world is bordering on panic and as a result volatility will remain high. This means the market may make crash-like moves, moves greater than 5%, in either direction, up or down.

The market technicals are oversold and starting to diverge from the price. However, since the primary factors affecting the market at the moment are the lack of liquidity and fear there remains a significant 5% to 10% additional risk to the downside before the current decline stabilizes and tries to reverse.

In this type of market, a delay of 1 or 2 days in the completion of the expected reversal of an indicator can have very negative consequences. For example, the McClellan oscillator is currently at -153, with the 10% index at -545. Normally this would be considered oversold enough to generate bounce but under the current conditions we will probably see the MCO go below -200. The 10% index is again below -500, an indication that regardless of whatever rally occurs in the next month we can expect a retest of the current lows.

SPX Daily - Click to enlarge

Chart oddities. The red down channel was drawn in across the highs. The Cyan down channel is calculated and has a slope equal to 1.382x the slope of the red down channel (marked 1.38 in red to right).

I have a 144-72 TD cycle date for the coming Tuesday.

The white fibonacci intervals to the right are based on the 2003-2008 low to high measure.

NYSE - Issues Below the 200 Day Average

In the two charts below I am examining an indicator which looks at the percentage of issues above or below the 200 day or 50 day moving average of price. When stocks are above their longer term moving average is is indicates that the stock price is in a rising trend, or about to enter a rising trend if the price has recently moved above the average. Conversely, if the price is below these averages it indicates the price is in a declining trend.

When we look at the entire universe of NYSE issues, and generate an aggregate percentage number for the number of issues which are above or below the longer term moving averages (50 day and 200 day) we can draw some conclusions about the behavior of the entire market in the same way. In bullish market behavior, the percentage of stocks above their long term moving averages will be in the upper half of the range (50% to 100%) and conversely in declining markets.

We need to remember that when the price is above its moving average, the value of the moving average increases, at a slower rate but it follows the trend. At high and low extremes, the price behavior flattens out or spikes and reverses. This type of price behavior will slow the rate of change of the moving average causing it to curl over and flatten out. While a few stocks can have long extended trends in one direction or another, is extraordinarily rare for the market as a whole to do this, there are always some stocks which start behaving in a direction counter to the market trend.

Therefore at market extremes we need to be sensitive to occasions when this indicator is also at an extreme. In the two charts I filled in with red the areas below the 50% line.

During the 2002-2003 market bottom, this indicator was below the 50% level at the end of the decline, indicating a time lag between the stocks which initially caused the market averages to decline, and the 'other' stocks which resisted the decline until late in its development.

In the current decline, the price behavior of a much larger number of stocks started to deteriorate much earlier in the correction phase. The large number of issues in negative trends (below the 200 day and 50 day moving averages) started much closer to the index highs than it did in the 2002-2003 period. While this indicator is now starting to reach extremes which are starting to be unsustainable it is also unlikely that the markets will just turn on a dime and move higher.

Not all stocks will bottom at the same time, and over the next two or three months, this indicator can give us a better indication on whether the trend is going to change or not.

The last two years

The 2002-2003 bottom for comparison.

MCO update - potential for a reversal?

The MCO a NYSE market breadth indicator is developing a short term reversal pattern which will lead to a rally relieving the current oversold condition. This rally could be quite sharp on the upside a bear market rally characteristic. I still see no compelling evidence that the NYSE has put in a bottom. Therefore I expect the rally to fail and the markets to retest this months lows again, probably around the end of the year. We are starting to enter the tax loss selling period which will put downward pressure on prices.

The markets remain highly volatile and dangerous, IRA investors should remain on the sidelines for the time being.

The MCO for 10/01/08 an annotated chart. Click to enlarge.