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Stocks, final selloff into the end of the week ?

Thu, Oct 9 2008, 08:25 GMT
by David Solin

FXA

The longer term bearish view on the Dow Jones Industrials for the last year remains in place (warned last Oct of at least a 12-18 month correction lower) as the market has accelerated lower after last week’s tumble below the 10350 area (both the 6 year bullish trendline and the falling support line since last Jan, see weekly chart below). With the Djia down about 35% in the last year, the market is clearly approaching oversold and suggests that scope starting to rise for at least a few months of correcting higher (and potentially more). Also, all of the action from authorities will at some point support such a bounce. However, a sustained upmove (more than just a sharp, but short-lived period of short covering) appears to a number of months away as the nearer term downside pattern is not yet “complete” (see shorter term below), while the downside patterns in a number of sector etf’s (including my 2 favorites, the xlf-financials and smhsemiconductors), are also not “complete”. Also, such a dramatic market move on the downside and overall economic/market concern takes time to “repair” itself, while likely poor company results and economic data (as the damage from the liquidity crisis starts to flow through) over the next few months will surely keep this lack of confidence high.
Bottom line for the longer term, the downside is not over though the bigger picture fall likely to slow and become more choppy (with sharp, countertrend bounces likely along the way lower from here). For now, would maintain the long held, longer term bearish bias.

Nearer term as mentioned above, there is scope for a sharp, countertrend bounce at virtually any time. Interesting to note that shorter term cycles point sharply lower into the end of this week, raising the potential for a final selloff/liquidation ahead of the weekend, and before a sharp snapback (minimum 700-800 points), possibly starting early next as cycles reverse higher (see “ideal” scenario in red on daily chart/2nd chart below). Also, the lack of a convincing, positive reaction to today’s coordinated, global rate cut will no doubt be viewed as a negative, and could be the trigger for such an end of week capitulation type selloff. Given the very short term nature of this potential selloff (too short for these emails) and some risk that the final bottom has already been seen (though not currently favored), would not try to catch such a move (at least in these emails and if not positioned). Instead however, if such a tumble does indeed occur, would be looking to buy early on Monday. Support is seen at the earlier 9195 low (also the broken bearish trendline from Jan 2000), 8600 and 7900 (50% retracement from the 1987 crash low at 1782). Also note that such a 700-800 countertrend bounce would be seen as a correction (wave 4 in the fall from the Sept high at 11168), with eventual new lows after and not the start of a major new, longer term upleg.

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Published on  Thu, Oct 9 2008, 08:31 GMT