Stock Market Crash Near End of Capitulation

So here goes.  The stock market has been crashing day after day and the Dow Jones is now at 8579 on today's close, down over 2300 points in seven trading days.  For the third day in a row, the market has attempted a morning gap and failed miserably.  The FED is throwing the kitchen sink at this market and the market is speaking loudly; the FED is too late.  The market is truly setting a new prescendent.  Volume, breadth, and the speed of this move down are all alarming; important support areas are being violated with ease.  The S&P 500 had major support at 1165 to 1175, 1060, and 960, the market didn't even think twice about holding these levels.  In reviewing our charts below, We may see 800 to 767 on the S&P before this leg is over.  If 800 provides good support, it may be that this market will trade within a gigantic trading range over the next few years.

Take a look at the Dow.  It has blasted through its bull market uptrend line and is in danger of challenging the 7500 area very soon.  That is the 2003 lows in this index.  Even if we eventually go lower, this level should hold it for at least a couple months. 

The fact of the matter is that this market is not like 1987, the fundamentals and technicals are much worse.  We have seen many important indicators that we track hit all time extremes and no buying is stepping in.  For example, the $VIX has hit 64 today and continues to break to new highs, the AAII bull/bear ratio is over 60% bears, and we have seen a historic up/down volume ratio in the market of 100:1 down to up volume.  For those of you who are not familiar with AAII.  It is a poll of bulls versus bears among market advisors and is recording a record bearish sentiment.  This SHOULD be extremely bullish for the market but the market refuses to rally.

It continues to trade with extremely oversold conditions until it doesn't.  Japan's Nikkei is down tremendously, another 10% as I write this and it appears that our markets will have a similar fate tomorrow.  It should open down huge and basically put the final stamp on this leg down.  We could be down 10% tomorrow at some point, if not more.  Look for a gigantic reversal to signal a low is in.

Using history as a guide, we can compare this move to the move that preceeded the bottom on Sept 21, 2001.  There are some similarities with the exception of the event that drove the price.  The descent into the July 2002 lows was similar, it took nearly 2 months for the market to drop almost 3000 points.  We *should* see a rally here and I use that word with caution as technical indicators are basically thrown out the door here.  There is a mass exodus and panic is flooding the streets(looking like blood tomorrow), and for good reason.  The Dow Jones has broken down through important monthly support. 

As Al mentioned in his update today, the market should be nearing a bottom of some sort, 8000 to 7500 should be a good support level.  A ferocious, multi-month rally should erupt out of this low and I will be selling into this strength.  Structurally, its broken on a bigger picture.  This means that it will not form a V bottom and when the market finds it bottom, it will test the eventual low a couple times before moving higher, similar to what we saw in 2002 - 2003 lows.  We are far from that happening at this point.

Trade very safely out there and don't even bother day trading unless you are a professional.  Many stocks are swinging 10% intraday with ease.  One bad move can remove ten good ones.

What will I do with my long position?  Well, I was obviously dead wrong with my purchase at 1200 on the S&P and I am currently sitting in a major drawdown.  I was caught in the wave of massive liquidation which caught me off guard;  I never expected this move to get as viscious as it did. 

Things have changed from my original plan; I am not going to sell on this panic.  I will wait for a counter-trend rally and get out when I see fit.  I will update my position on this blog.  Getting out now is probably not the smartest move.