This too shall past

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 08, 2008.

After trading about 1.5% higher at the open on the FED’s plan to short up short-term corporate borrowing, stocks quickly turned lower by midmorning amid weak earning report from Bank of America (BAC) and cautious comments from the FED Chairman Ben Bernanke. For the day, the Dow Jones industrial average lost 508 points or 5.1% to close at 9447 – the level that had not seen since September 2003. While the blue-chips index closed near the intraday low and took out Monday’s low, volume was lower and the VIX didn’t spike as high as it did on Monday. The lack of volume in Tuesday’ massive decline, in fact, suggested that we’re in an orderly sell-off phase rather than a panic selling mode. Also, the low volume points more to a lack of buyers than a decrease in selling pressure.


Chart 1.1 – CBOE Volatility index (daily).

The closely watch market’s gauge of fear, the CBOE Volatility index, or VIX, soared past 50 for a second day in a row. Notably, while the VIX close higher, it didn’t spike as high as it did Monday. So we could be in an orderly distribution mode rather than a panic selling phase.

In the past, when we’ve got such an extreme amount of fear in the market, one would expect the market to bottom and stocks move a bit higher for a period of time. However, it’s different this time. Despite the historical high readings in a majority of important market indicators, the board market, S&P 500, index took out the important sentiment 1000 level.


Chart 1.2 – Standard & Poor’s 500 index (daily).

As you can see from the above chart, Tuesday’s decline pushed prices below key support at the area of Monday’s low. This is bad because it had invalidated the previous bullish set-up. In addition, the fact that the market can not even sustain a modest bounce in the face of an extreme oversold condition is very disappointing. It’s suggesting that we might have gone to a point where technical indicators and valuations are no longer work.

Right now the most obvious level to watch is the 2003 bullish breakout point, about 940. This is a very strong support. So there is a pretty good chance that we’ll see some sorts of modest rebounds around this level. As usual we must stress out that a failure to hold above the 940 level indicates that a retest of the previous bear market low, about 768, is inevitable.

In summary: like many of you, we’re searching for the best route to take and we wish that we could paint a perfect roadmap for all of us to trade by. Unfortunately, so far, there are virtually no models or patterns or history that can provide a good roadmap through the current financial crisis. In short, we think that the market had gone to a point where history isn’t a good guide anymore. It’s well-known that when terror strikes, all the analysis under the sun goes out the window. Although like many tough times in the past, this too shall past. That’s being said, if we believe that the US government will be trying everything it could – includes printing money at the speed of light – just to keep the financial system running, then it’s possible that we will get through this sooner rather than later.


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.