Market is in a low motion crash mode
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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 10, 2008.
Yesterday we’ve said that: “while Wednesday’s trading action was not a true capitulation in the traditional sense, the market is so oversold that the probabilities increasingly favor a counter-trend rebound. However, until the market shows the ability to absorb bad news, ‘sell the rally’ remains the most profitable strategy.” Stocks rebound nicely Thursday morning with the Dow gained more than 260 points at its intraday high before sellers stepped in and took the market dramatically lower. For the day, the Dow Jones industrial average lost 679 points, or 7.3% to close at 8579 - its lowest point since May 21, 2003. Over the last seven sessions, the Dow has lost 2,271 points, or 20.1%. Since hitting an all-time high of 14,164.53 one year ago, the Dow has lost 39.4%.
Needless to say, Thursday trading action was very disappointing. Despite the fact that Washington is doing everything it can to stabilize the financial system - it may even guarantee loans between banks - the market can’t muster a rally in the face of an extremely oversold condition. What’s the problem?
It’s well-known that not only that equity market has been hurt by concerns about wider losses - credit card, residential & commercial real estate…etc - there is no “E” in the P/E. In plain English, there is no “Earnings” in the “Price/Earnings” Ratio. Also, not only that many companies had stopped releasing earning guidance, shell-shocked by the events in financials in the past couple of months, many analysts are giving up. No one has a clue on what earnings will be. All we know is that third quarter earnings will still be poor, third-quarter GDP will be a disaster. And with no visibility on earnings, we can’t even estimate the fair value for the S&P. And without value, we can’t trade. This is a BIG problem!
Speaking of earnings, tech bellwether IBM (IBM) gave investors some temporary assurance Thursday morning that despite the financial crisis, the tech sector remains safe and sound. The Big Blue jumped more than 5% immediately followed the better-than-expected earnings, but it eventually got dragged down in the afternoon slump, down nearly 1.8%. Just so that you know, the stock had lost about 30% immediately followed our “Trend Forecaster Bulletin” sell signal back in July 2008.
Chart 1.1 – IBM (weekly).
Looking at the two-year weekly chart of IBM, we can see that there is currently a test of key support just above the 86 level. At this moment, it’s impossible to know for sure whether this level holds or not though a violation of this support will increase the odds for a test of the 2006 low, about 70. In short, the near-term outlook remains bearish barring a close above 107.
Thursday massive decline had pushed the S&P 500 index into the level that had not seen since April 2003.
Chart 1.2 – Standard & Poor’s 500 index (weekly).
As you can see, the board market index is heading toward critical support at the area of the 2002 closing low immediately followed a break of the important 960 level. At 909, the S&P had lost about 28% since September 19 short-sale ban rally high at 1265. And down nearly 42% from the all-time high of 1565.15 recorded one year ago. With these losses, we’re, by definition, in a stock market crash mode. Because of the modern market’s circuit breakers we’ll probably never see a one-day 20% drop like we had in 1987. But we’ve had a 5-day period that’s just as bad, if not worse as any 5 days around the 1987 crash without having a single halt in trading. It’s like a slow motion, controlled crash.
Right now the most important level to watch is the 2002 closing low, around 776 – that’s about 15% from where we sit. While this is the mother of all supports, we are in a free fall right now and fundamentals have been thrown out the window, so the market may simply continue lower.
In summary: general speaking, the market is in a low motion crash mode. At this stage, it’s impossible to call a bottom in equity market or to say when confident will return to stocks. Although it seems to us that we will likely capitulate soon. Right now the strategy is to wait for a bounce trade as soon as price patterns show us that the level of maximum pain has been reached.
Until next time, good luck.
(By: Michelle Mai for Capital Essence)
Note: Michelle Mai writes technical analysis for Capital Essence and is the editor of Capital Essence’s “Market Outlook” newsletter. To receive the daily edition, please subscribe. It’s now available at a monthly rate.
