A Critical Juncture for the Market

By Dr. Duru written for One-Twenty

November 4, 2008


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The market can sure have a knack for drama. On the eve of selecting our next President, the major U.S. market indices find themselves at a critical juncture. Before spending my time watching election results, I decided to do a quick review of where the market stands. I am most encouraged that the typical indicators I use to watch short-term movements seem ready to work again.

First, the VIX, the volatility index. The VIX uptrend has almost been broken. It broke the primary uptrend defined by the 20DMA (see chart below) and is now neatly resting on the 50DMA (my data may not include the final close). This support is much more important. Break this, and I suspect we will hit 30 relatively quickly. At those levels, the market should experience more "sane" daily fluctuations. Just in case the stochastics matter on the VIX, I thought I would also mention that we are now in deep oversold territory for the VIX (not shown). In other words, the odds are high that the VIX will find credible support at the 50DMA and bounce back up from here.

VIX at a critical juncture


A bounce back up in the VIX would make a lot of sense because it would coincide with a market that is now very over-bought and has run smack into important resistance levels (see TraderMike for the specifics on key resistance). If we get an "orderly" retreat, buying the dip will make a lot of sense and we should look forward to a bear market rally that could have some serious legs absent any news worse than what we have already suffered the last two months. In other words, we flushed out a LOT of sellers, but the next test is to see how strong are the hands of the buyers. We have bounced very sharply - the temptation to close out here for the rest of the year will be very high.

Lastly, T2108, the percentage of stocks above their 40DMA, is right at the critical level of 20% (see chart below). We have traded at or under this level since September 29, 2008 for an astonishing total of 28 days. Since 1986, this is now the second longest amount of time we have ever spent in such abysmal territory. The 1987 crash is still tops at 42 trading days. Again, given the unprecedented nature of the times we are in, it would "make sense" for the T2108 to fail here at 20% and reverse for a while longer - giving the 1987 record a real run for the money. (Note in the chart below how the first two climactic lows of the year gave us bounces off T2108 at 20%. July's low crashed through 20% and gave us what looked like then a historic bout of selling and a cataclysmic low. This time, we not only punched through 20%, but we went straight down to single digits and lingered near 0% for several weeks! I am not yet ready to contemplate that we still have not produced a final catalysmic low for this bear market out of all this mess.)

T2108 at critical juncture


So all told, we have had an incredible V-shaped bounce from the bottom that looks ready for a rest. We have catalysts ahead of us which could cause more twisting in the winds: election uncertainties (even if we are confirmed on the President, important Senate races could go to run-offs for December decisions), pending rate cuts in Europe (do they dare disappoint?), a jobs report on Friday which could shock us back to the reality of a prolonged recession, and tax-loss selling going into December. V-bounces typically give way to some kind of correction that could retest the previous lows. The nature of this likely correction should reveal what kind of bear market rally we have in hand.

(Quick side note - solar enthusiasts have to LOVE the monster move that continues in the solar-related stocks. Several cross-currents converging nicely that I incompletely described in my last piece. As usual, as soon as I dare to write anything on solar stocks, I feel compelled to write an update. I hope to get there soon...)

Be careful out there!

Full disclosure: No related positions. For other disclaimers click here.

DR. DURU®, 2008

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