Market Makes Another Nasty Fall & Still Looks Lower

Well, it appears that we were a bit early on our entry to go long with 50% of our anticipated position in this market on yesterday's close, but hindsight is always 20/20.  I want to reiterate that this is a long term position of 9 to 12 months.  Catching the exact bottom is very difficult in a market like this and for this reason I am initiating my position in two batches.  I firmly believe the market will head substantially higher from these levels in the next few months.

The market continues the waterfall decline we discussed a couple of days back.  Today, the DOW, SPX and NYSE closed beneath the lows that were put in yesterday, the trend remains down and down hard.  Volume expanded on both the SPY and DIA but contracted on the QQQQ; in fact, we recorded record volume today in the DIA (Dow Jones ETF) and SPY (S&P 500 ETF).  A selling climax is in progress and finding the bottom in this one will be tricky.  The short sellers are euphoric, the short interest is at record levels, there were over 1000 stocks hitting fresh 52 week lows, and fear is rampant in the market.  We still need to see a panic day like today, but with a huge intraday reversal of 500 to 600 points on the Dow, maybe even more.  That will most likely put the final lows in.  Shorts will be squeezed beyond their wildest imagination.  Sentiment is probably near the lowest levels that I have ever witnessed in my trading career.  All of this indicative of a major price bottom.  The problem with technical analysis in a market like this is that there is just too much fear which will create swings that overshoot technical targets. 

The $VIX index closed at its highest level six years and there are now talks of Morgan Stanley and Wachovia merging.  Goldman was even feared to be a victim of the subprime massacre on Wall Street.  No one is safe.  At one point, Goldman was down 30% and broke through 100.  Morgan Stanley continues to drop like a rock and was down about 25% today and much lower intraday. 

With all of this being said, the UYG ultra proshares are still ABOVE their July lows.  This is quite interesting and shows you that there is actually strength in the banking sector, if you can believe that.   I am closely watching the zone of support labeled in our chart below.  UYG could run down into the 14.75 to 15.75 region before catching itself. 

I have been mentioning the 50% retracement of the Dow Jones on a monthly basis starting from the 2003 bottom.  That level was breached today on a closing basis.  If we see a panic selloff, or mini crash event, the next level of support is 10,000 on the Dow.  This represents the 61.8% retracement level of that move.  I suspect that this market will stop between today's close of 10610 and 10000.  The bottom is not far off in time but may be a few hundred points lower in price. 

Again, this is not a market for inexperienced day traders.  The intra-day moves are extremely volatile to the point where they are almost random in nature.  The risk that one would need to take is very large in this type of trading environment and really not even worth trading, in my honest opinion.

I have been asked:  "When will I say that I am wrong on this market?"  If we close below 10,000 on the Dow Jones on a weekly basis, I will seriously re-evaluate my position and probably close it out.  That is about 6% lower than current levels.

Until tomorrow..........