*** Possible Scenarios:
1) The Summation numbers are so extremely negative and oversold, that it takes enormous selling pressure now to keep forcing the market down (link was provided yesterday). Thus, one possible scenario is for the quasi-capitulation bottom a week ago Friday (Spx 839) was successfully tested on Thursday morning (865), and that we could see a rally now as long as any weakness is contained early this week.
Some factors that market participants and pros are looking at are the Libor rates, if they can drop, and it T-bill rates can rise, then it might encourage buyers. Bill rates falling can indicate the aversion towards risk, i.e. stocks, might be waning some. Libor rates indicate the liquidity trends.
If the market can hold up while bad news keeps coming out this week would also be encouraging. Also if the market can have smaller ranges and less volatility, it might portend a technical rally is coming.
If so, then a rally to Spx 1,000, psychological resistance, or to actual resistance at 1044, a prior top, could occur in the next week or weeks.
Just a few days ago, it appeared to me and many technicians that a retest of those lower support levels, namely, 865 and 839, was likely late last week or this coming week. In the last few days, the market action has been a little more constructive as new lows and breadth has been improving. A decline in the VIX would be positive.
Sentiment as measured by Investors Intelligence and American Association of Individual Investors has been so extremely bearish lately that as a contrarian indicator, it has become positive. When so many are bearish, it usually means that they have sold out and thus are not able to sell more, and their cash positions will eventually be put back into stocks. When they are extremely bullish, it means they are fully invested and will be selling to take profits or to protect profits.
First order of busines technically for the Spx is to take out 984, after closing at 940 on Friday. On Friday the Dow was down over 1% while the Spx was down only .6 of 1%, so it was not as negative.
2) But redemptions have been enormous in the past few days as well as having accelerated the past few weeks, and if they continue, the market could suffer more. If more bank failures or bad news on Monday's China GDP numbers, (e.g if it is 2-5% instead of the expected 7-9%, with a pivot point of 6%, my guess), or more country disasters like Iceland's stock market crash, are manifest, then the market could once again fall to test support at Spx 865, or even 839.
The VIX has been rising sharply in the past few days and weeks as well, having risen to over 50, then over 60, over 70, and to the 80 area. If it remains so high, then the market could suffer another round of major distribution.
Art Cashin, an experienced trader on the floor of the NYSE, talked about a retest of the low at 839 as likely, and I agree, but it might not occur until after we have a technical rally.
If the credit and liquidity freeze doesn't thaw significantly and soon, the market could be vulnerable again.
Market crashes can be like the one we had in '87, which was relatively ephemeral, or like the one we had in '01 after Sept.11 which lasted another year, or like '73-'74, which was about two years and almost 50% down, or like '29-'32, which was over 85% down from the highs.
The systemic problems in the current secular bear market are so severe that it is not likely to be over this month, but even severe bears have sharp rallies from time to time, that last 1-4 months.
3) The market could have a weak rally in the next week or two and then come right back down to test 865 and 839. A series of higher highs or lower lows will be the watchword.
Another leg down to below 839 is likely sometime, but it is not a sure thing that it will be imminent.
As far as crude oil and commodities are concerned, they have been crushed as much or more than the general market, as have their common stocks.
Crude oil fell over 50% from 147 to as low as the 67's intra-day, and has been tracking the trend of the market and has been hurt by the strength of the U.S. dollar in the past few quarters. So many, including Merrill Lynch, have turned so bearish on oil and commodities, that they may be washed out of any long positions and are overweighted in cash or short.
Commodities and commodity-related stocks have been adjusting (sharply downward) to the global slowdown in terms of current and future demand, to the point that stock valuations are extremely low, even when taking into account their lowered revenues/earnings expected next year.
Crude oil may be starting to stabilize and might be rangebound finally, and that range could be the mid-60's to the mid-70's for the next few weeks.
The technical action early this week might portend the next major move in the stock markets, and choppiness will probably stay with us.
Look for closes either below Spx 918 or above 984, as signs. And intra-day, look for TRINs and u/d vol figures, as other signs. And another capitulation (with a bullish intra-day reversal) could be an interesting signal.
jmho,
drbob
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