Stock Market at a Critical Juncture

So much for a boring market. The bears certainly arrived on the scene this week. Although some bulls finally showed up, too, it may not be enough. The financials continue to weigh heavily on the market. The thought of nationalizing banks and destroying shareholder equity is apparently a most unsettling prospect for investors. The administration promises to provide more information regarding its methods to save the banks, but will the clarity be enough to satiate the masses and save the markets?

The market is at a critical juncture. In particular, the DJIA is in a great deal of trouble. A Dow Theory sell signal occurred on Thursday after the DJIA closed below its November low. The news of this occurrence was trumpeted by the media outlets. The detractors of the theory claim that considering these indexes are based on only a handful of stocks in the DJIA and Dow Transportation Index, the theory does not provide any true indication of market weakness/strength.

While this may be the case, how often is it that the DJIA and S&P 500 diverge? Most of the time, both indexes move in an almost lockstep fashion. Personally, while I would not hang my hat on Dow Theory, I would also not ignore this ominous signal; it is certainly something to be considered. Currently, the DJIA has support in the 6700 area and faces resistance in the 7500 area.

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For the S&P 500, it is make or break time. The million dollar question is “was Friday’s rebound a successful retest?” The index came within several points of the November low. Volume was also extremely strong as it was an options expiration day. The S&P 500 has support at 750 and faces resistance at 800.

The VIX does provide some hope. On Friday, it could not hold above 50 and finished at 49.30. As stated several times, it has been caught in a downtrend ever since October. Slowly but surely, fear has been leaving the market, which may provide a more suitable environment for trading.

There is also some evidence indicating a market bounce may occur. At this time, only 16.58% of NYSE stocks are above their 50 day moving average. This constitutes an oversold reading. Also notice the divergence that has occurred since October. The gradual uptrend indicates underlying strength within the market.

Monday’s action should give us an idea whether the S&P 500 retest will hold. Remember, now is not the time to be a hero and wildly throw money at the market. Losing your hard-earned cash does not make you “tough” or show you have “guts.” If you think the market “just can’t go lower,” think again. As always, risk management is the key to success.

Disclosure: no positions

Comments

[OldLimey:]

"The VIX does provide some hope. On Friday, it could not hold above 50 and finished at 49.30."

On the other hand, to my eyes the VIX broke north through a 3-month trend-line and closed above it. I guess it's all 'in the eye of the beholder'.

Feb 22 01:19 PM

[Fred Voetsch:]

It can go lower and it will. Dow 5,000 by the end of the year. I fully expect this to be the worst year on record for the Dow.

Feb 22 03:32 PM

[the ilster:]

Yeah this is a very bad market and it is reflecting a serious downturn coming on Mainstreet. Were screwed buy gold or get short.

Feb 22 03:44 PM

[joes:]

Nice to see the pessimism, this could be the worst year on record as predicted or it could be up significantly, there is no indication that anyone has a better idea than the next guy.

As Schiller and others have pointed out, we are in the area of psychology and influencers driving the market and there is nothing than can turn around more quickly than investor sentiment.

Feb 22 04:06 PM

[Maxe Paul:]

I expect a bottom to occur in March, when we see a European country (or two!) default on it's deabt. We may then see a large bear market rally, only to ultimately go lower.

Feb 23 02:00 AM

[campo:]

The deals are there. There is huge cash on the sidelines. Once the shorts start getting slapped, and there is good economic news, The train will leave the station. All aboard?

Feb 23 05:23 AM

[Digiweb:]

Something isn't adding up.

Don't we want the Vix to rise substantially to signal panic selling and capitulation?

We already have a calm 200 point a day sell off pattern.

If you're short the falling Vix is good. No panic, just a steady stream of sell sell sell.

Feb 24 01:30 AM