Today was another historic day on Wall Street. Markets plunged again, as the "sell the news" reaction to the Wall Street bailout package passed by Congress on Friday continued in the markets today. At one point the Dow was down over 700 points (after being down 777 points last Monday). A late day rally, due to rumors of a coordinated global central bank rate cut, provided a significant rebound, even though most major indices ended down about 4%.
Apparently, Jim Cramer was on the Today Show this morning telling people to sell. Unfortunately, this is not very good advice, at least not right now. I am not a perma-bull. In fact, even though my blog was shut down for some time, as those of you who speak to me on a regular basis know, I actually have been quite bearish for the past several weeks.
The market will still have more downside to come, and the Dow will probably hit around 8,500, however, this price retracement will likely occur after we experience a short-term rally. Why am I suddenly bullish? First, again, it is only on a short-term basis (on the order of 4-12 weeks). Second, we have hit extremes on mutiple technical and sentiment indicators which are all indicating that we are about to bounce. For example, the VIX (volatility index) hit an all-time high today (56), new 52-week lows his an all-time high, and the % of stocks above their respective 40-day moving averages is only 4%. Stochastics are showing over-sold conditions, and the markets printed a "hammer" candlestick today, which is often a good indicator of a reversal in trend.
We may still go down tomorrow, and may even retest the lows that were experienced intra-day today, but things cannot get much more oversold than they are right now, and the "rubber band" that defines the price action of the markets will undergo a snap-back rally. We don't know how far the rally will go, as there are multiple levels of price resistance overhead in the forms of horizontal and moving average resistance, however, selling what you own today, or even tomorrow, would be at a time when a short to intermediate bottom might be emerging on the charts. The time to sell will be when the next rally loses steam. Why then?
Because the stock market is undergoing a major correction, and rightfully so, as this is one of the worst financial crises in the history of the U.S. Joblessness claims are only going to start ramping up signficantly after the new year. Yes, the market "looks ahead" by about 6 months, but folks, sad to say, this economy is not going to get better in the next 6 months. We will be looking at 1-3 years of economic slowdown/recession. The charts look horrific, and it will take a significant amount of time to correct the extensive technical damage on all of the charts. Bear market rallies are expected, and they can be vigorous, but don't lose sight of the long-term trend (down, down, down).
Hang in there.