Market Unstable and Vulnerable to a Crash

Wow...where do I start?  Just returned from my "vacation" from France.  I wish it was a vacation.  Watching the greatest level of volatility that I have ever seen in the markets was nautious.  Nearly 5% swings in the market almost every single day last week.  Unbelievable price action.  I am still long but cautiously as the markets look very shaky here.  I was clearly wrong and may use a bounce as an opportunity to clear my long positions and re-assess.  The market has decidedly closed below the 50% retracement levels on the Dow Jones & S&P 500; however, they both remain above the 61.8% retracement level.  The Nasdaq, which has held up the strongest in relation to its 2003 bottom, has now penetrated its 50% retracement level as well.

The market is very unstable right now.  Fear is at record levels, according to the VIX and many market gauges are extremely oversold. 

However, oversold can become more oversold and indicators can continue to move further overbought or oversold especially when they are in uncharted territory.  The fact of the matter is that the action from last week, especially Friday was extremely disturbing.  The approval of TARP was announced Friday afternoon.  At the time, the Dow Jones was up 350 points.  The Dow closed DOWN 150, marking a 500 point reveral in a couple of hours.  The government may have just been too late in their action and the market may just crash here.  I am hesitant to make such a statement since so many are calling for one.  I have never seen a crash that was predicted by so many.

I have labeled some support levels on the Dow Jones chart below; however, any type of crash event will blow these support levels out.

We are in the month of October.  We all know that this month historically produces major bottoms in markets which are in a sharp downtrend.  With that being said, October also has a history of producing declines which can blow out technical targets, trend lines and conventional wisdom.  Fear is easy to sell and even easier to sell in October, almost as a self fullfilling prophecy.  Everywhere you turn, you see extremely negative commentary regarding the markets.  I may be stopped out but I do believe that we WILL see a tradeable bottom in October and it will be a bottom that will last for at least a couple months.  This is the perfect time for big players to pick up shares on the cheap.  It happens every time, no matter what the news is.

Short Term Analysis

In the near term, you can see a pattern of lower volume on the move down.  While the market can continue to move lower on lighter volume, this is a clue that it may be nearing a reversal of some sorts.  I want to see a close above 10460 and this could put an end to this move, at least temporarily.

Let's not forget the banking sector which continues to hold 10% above its September lows, at least on the UYG.  The relative outperformance of the banks continue to have me believing that we will see a rally shortly.

Waiting for more clues.....Monday should be a very informative day.  If a severe decline was to occur, it could easily happen Monday.