Market Bottom - or prelude to a crash?

If there is a sign for a market bottom why should we be cautious. If there is caution then there is fear. If there is fear then there is more then likely more downside.
I agree with the dollar. I am going against the rule and buying more FXE as it falls. Dollar rally is short lived.

I picked a helluva time to create a long term portfolio based on the information of the traders here, but if this is a bottom then maybe things will pick up from here on out!

First let me say that I think Dirty Harry's posts are great and carry a lot of value, thanks DH!

Second, I lean towards the first with some important caveats...I base the following comments on looking over CBOE and other technicals over the last 10 years for a clue towards the next 6months to 2 years...

I think we're in a bottoming process that might well see a short bounce up lasting anywhere from one to even 3months (although that's a stretch)..afterwards I see continued downward turbulence breaking through 10,000 and maybe even getting to 9,000..however I think the plunge,again, will be brief one to three months..with stock market recovery beginning slowly sometime in mid-09 give or take two or three months either way...so to recap: short bounce up, another plunge, sideways stabilization, slow recovery..time frame: today--Sept-09

Good Luck to everyone!

dgryder:

I stated why we should be cautious: The current market is being heavily manipulated by governmental intervention. Bailouts, short selling bans, blank checks, etc. So what I'm saying is that even if the numbers appear to be a bottom, the numbers are tweaked by the hand of government. I believe that the market is not really in a "natural" state because of the constant interference.

I'm of the school of thought that where there is great fear, there is a strong possibility you are at or near the bottom. Great fear usually produces great sell-offs. Great sell-offs leave people with cash, and less SELLERS (because they've already sold).

Warren Buffett has commented "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." He too shares the belief that extreme fear is that the bottom of the market, not the top. Think back to the tech boom when people that knew nothing about stocks (but owned them anyway) bragged at cocktail parties about their high-flying companies. In the moment of the least fear and the most joy, their dreams were shattered with a market collapse.

There is one way to see this in action. Just look at the VIX which is the volatility index. Here we are, over 45. It hasn't been that way since the tech bubble burst. The VIX is a measure of volatility and is sometimes referred to as a fear index. It measures the increase of premiums associated with options. If you compare the high spikes with the DOW or S&P 500, you will see that very high spikes correspond to interim market bottoms. We are on one of those very sharp spikes at this very moment:

http://bigc​harts.market​watch.com/qu​ickchart/quic​kchart.asp?s​ymb=vix&sid=0​&o_symb=vix&​freq=1&time=9

Finally, you and I actually agree that the dollar rally will be short lived. That is why I bought GLD calls today and DBC, a commodities ETF. I am also probably going to recommend one or two commodity-related stocks to my followers tonight that should do very well in a market recovery + dollar drop scenario.

You commented "I agree with the dollar" as if to suggest that a falling dollar will equate to a falling market (when taken in context from your prior sentence). Today that was obviously not the case as the dollar soared while the market dumped hard. If you then combine your "agreement" with your other statement that the rally will be short-lived (ie, the dollar will fall), why would you not conclude that the market will rally opposite against the dollar?

PS: Domination - make sure any long term portfolio you put together has a good amount dedicated to gold. The day people realize that the trillions of dollars that have been printed aren't worth what they thought they were, we'll see gold reach for $2000/oz

I don't see a bottom. What I do see are a lot of conflicting technical signals. No doubt this has to do with the abnormality of the environment (bailout and economic meltdown) as mentioned by harry.

My conclusion is that there is no bottom yet, although technically a case could be made for one, if one only picks out the bullish indicators. A look at a complete set of indicators leaves one with divergences that would concern me greatly if I were holding longer term.

Thanks lobots10.

When I call these bottoms, let me be clear that I see them as "interim bottoms" and am not calling the true major bottom. I'm a short term swing trader, so I'm looking for places to bounce off of for 1 to 3 weeks.

I have found those VectorVest numbers to serve as an accurate indicator of extremely oversold conditions that lead to a bounce. Those indicators have been more accurate than any others I have used. I also think the VIX is a strong backup to the VV indicators.

I also acknowledge that this is a very difficult time to be sure about anything because the government is constantly swaying the market one way or another. It makes it difficult to know if these numbers are just a product of their manipulation, or if they are occuring due to more natural market conditions.

I've decided to follow the indicator today as a confirmed interim bottom and I am going long. I haven't done my buys here yet, but I'll share them here anyway. A bunch of ETFs this time. In real trades, these are all limit orders at the prices given.

MOO 31.5
XME 40.03
KOL 26.46
USD 27.8
RSX 25.5 (small / half buy)
MOS - market order, small buy

No volume on the S&P yesterday - we're turning UP.... but it's a dead cat/reflex rally. If it holds on (by the fingernails) until after the election AND Bernanke cuts rates, we could see the whole lot take off upside. (So will gold b/c of the outrageous ensuing inflation, but that's that.) At that point then, watch for commodities to take off too.




OH BY THE WAY - Did you notice how MET got destroyed in the last couple of days b/c of Harry Reid's dumbass remarks? That's a classic event driven drop, and the upside could be make for a very nice trade... There are probably a few others that took the same hit but that seemed like a good one to me.

Sorry, hit the enter button -

I like the RSX and the USD, XME is a great long term hold IMHO. MOO? Nah, I'd go with DAG in about a month or so and then DIGtoo for oil and gas.


Yesterday I bought MET, SSO, AGM and DGP. I'm still short the dollar in 2.5X ultrashort direxions fund.

Dirtyharry,

Thanks for the info from VectorVest... I agree that commodities could get a bounce here soon after the hedge funds are done with selling to meet redemptions or margin calls. But worry that the rally will be short lived because the China's growth is faltering.

Harry my man!!! Stay away from Russia. That is like investing in the mob.

I know RSX is a riskier play which is why I commented to make is a smaller buy than the other ETFs. They have their problems, but it doesn't make their markets valueless.

BTW, these days, investing on Wall Street is a little like investing in the mob too!

LOL Dirty - WS is definitely like an episode of Soprano's - nice!

I've bought some DGP at 17.47 as a hedge as market collapse.

dirtyharry, what is the read on VW for today? I flipped DGP for a quick gain, but is holding on a loss in SSO that I bought around 45.

I just ran some "triangles" at INO.Com and I am afraid we have not reached bottom yet. Play the DXD and QID on every rallyuntil get through this.

Ok, can anyone explain why everyone wanted the "bailout" to be good for the market, they finally pass it and now the market dropped hard?

Buy the Rumor Sell the News kind of thing,

Also it's not even been 24 hrs. Now it's back to just a good old possible depression, like it was before.

MasterOFate -

The VV numbers are unbelievably low today.

Yesterday:

Buys=5 Sells=67 B/S=0.08 MTI=.41

TODAY:

Buys=4 Sells=70 B/S=0.06 MTI=.37

7/23/02:

Buys=2 Sells=77 B/S=0.02 MTI=.34

You have to go far back to get numbers this low. MTI in the .30's is LOW LOW LOW. 70% sells means that 70% of the stocks they rate are currently below a modified 13 week moving average.....so this means that prices a broadly depressed and not just concentrated in a few sectors. Likewise a buys of 4% means less than 1 in 20 stocks meet very minimal requirements of valuation and price momentum (flat or better).


All of these figures are rather striking to me, as I'm used to studying them daily. VIX still hanging around 45.....WOW! I like the DGP buy. Check out the dollar DXY peaking out. Maybe we get a bounce in commodities next week too.

http://bigc​harts.market​watch.com/qu​ickchart/quic​kchart.asp?s​ymb=dxy&sid=0​&o_symb=dxy&​freq=1&time=8

Hi Harry, thanks for a great post.
I think the downs in the market are created by people sitting on the sidelines in cash. Psychologically, people need to be invested. I think the congress bill was meant to subside the fears of collapse.. it looks like it hasn't done a very good job :)
My point is that an upward spike is in the cards the minute people feel it's safe to go back in and do some bargain shopping. As Q3 reports start coming out I expect more buying then selling and some relief to my beaten up positions.
I got out of about 60% of my positions in January and wish I took more out.
My analysis of the market is that pricing has little to do with value these days. Look at Chesapeake energy (CHK) for example.. How does a company that just made a huge gas find loose 40% in value?... the answer is - it doesn't.. people are in a panic.
My advice is hold on to good companies with no debt and strong product demand and buy not on rumor, but as good news comes out. Q3 reports will be very interesting to look at.

Thanks, Harry. If we don't get worldwide rate cut on Monday, we could go down to 7/23/02 level.

guiliamo -

Generally I'm in agreement with you, but as we've seen there are companies that have lost more than 40% in value that make good profits. They fall 40% and you think they're over, and then they've got another 20% (from their tops) to fall. Chemical fertilizers come to mind (CF, POT, MOS). I got killed on gas companies too in the last few months.

Now we have a situation where the bailout is in effect, yet the market still drops further. In fact, it drops so far it produces oversold numbers in my quant program not seen in over six years. I believe the market is still generally down, and when someone posts here or in another thread that they think we've got more to go - perhaps 2000 points more - I am in agreement.

This post is trying to discuss the possibility of an interim bottom. A bottom that is tradable. Can we get a rally here that lasts 3 days to 2 weeks before turning around and heading south? A lot of smart traders here have large short positions through ultrashort ETFs - and they're still holding them.

I don't claim to know everything, and when I see a consensus like this I cannot ignore it. Still, it's hard for me to look at the numbers out there and technicals and not want to hold some long positions in quality, profitable companies. If the market moves down I should at least be holding a broad ultrashort ETF to hedge.

I have a feeling that the initial $250B from the bailout plan will be used quickly to buy up bad debt. This is according to Secretary Paulson. Will it have an affect immediately? Will it have any affect on Monday's market? I really don't know. This is the problem with trading this market. We're left guessing what the government is going to do instead of analyzing what individual stocks and market sectors are doing. I'm glad I'm not the only one here that sees that big rally potential and has bought some undervalued companies.

MasterOFate - It's certainly possible. Nothing says we can't hit old lows or even make new ones. Those numbers have served me very well in the past as far as picking an interim market bottom. I'll acknowledge though that these are extra stressful times and that we just might see further collapse in the marketplace. A rally could be explosive though from this point, like what we saw on Sept. 18th & 19th, and probably just as short-lived.

I generally agree that the market will keep going down, and that we should be buying ultrashort ETFs on market rallies. However, I don't believe we're in rally mode at the moment which makes it hard for me to justify adding ultrashort ETFs right here, right now. I'd love for someone else to comment that is very short, and staying short in this position.

DirtyHarry - I tried to go long on Thursday figuring that the bailout might produce a rally. I bought some AAPL at $102, thinking what a great buy, down from $180 seven weeks ago. Great global company with a lot going for them. I put in a 5% stop as I don't like to lose anymore than that, especially since I'm up considerably with my LEH (in at 17c, out at 38c) from last week and a 30% gain on WB this week, a couple hour hold.

Great AAPL at $102, so I hold it overnight, watch it yesterday morning, it's going up to $106 and within a minute it dropped from $106 to $94 and then rallied back. Closed at $97. I sold out at $104 just to get out as I saw the weakness coming.

I guess my point is this market is just too weird. There is sooooo much negativity in the market as evidenced by the VIX, that until we see some positive news on the economy and jobs it only looks to be down from here.

Can I stay short, well the DXD looks inviting right here as I mentioned in my other post. I will probably look for an entry point to go short with DXD or QID on Monday or Tuesday as the fundamentals are shaping up for a positive move to the upside. In my experience whenever the RSI hits 68% on a uptrend, the OBV is at record highs, and the specific stock or ETF is making new highs against the S&P, it's usually a indicator of a big move to the upside.

I assume you're talking about the RSI on QID right now. I see the uptrend and I see the strength. There is no doubt a compelling argument for a market drop here, despite the incredibly oversold position. After all, that's what a crash really is. It's an oversold condition to the Nth degree. It's an oversold condition that becomes even more oversold "beyond belief".....exasperation and capitulation.

The title of my thread does question whether or not this is a prelude to a crash. How do you reconcile the extreme VIX with what usually follows? Meaning, if you plot the VIX against a general index, historically speaking the VIX would be indicating that we are at an extreme low in the market. I suppose there is no law to stop the VIX from breaking 50 or higher, which would probably indicate we're in a state of collapse.

If we do head down sharply, I would think it would be the financials leading us which means SKF might be the better play. However, its RSI is only about 50 at the moment.

I remember telling myself that if AAPL got below $115 I'd buy some, and then I just watched it keep falling (never took a position). The MACD looks terrible on AAPL right now, showing a sharp downtrend that doesn't seem to be breaking.

I hold long positions at the moment, but concede that we could be in for some real trouble this week. I'm wondering if we're going to get one more big head-fake before the dump. Maybe an up day on Monday to pull people in, followed by a pretty bad Tuesday (or perhaps that's just wishful thinking on my part). Any thoughts on that?

Well, let's look at the reporting that's due next week.

1. Alcoa and Monsanto report on Tuesday

2. Consumer credit data for August on Tuesday as well as the minutes from the last Fed
meeting. The market is already anticipating a 50 basis point cut at the end of Oct.

3. Pending Home Sales for August on Wednesday

4. Weekly jobless claims as well as wholesale trade data and Chevron on Thursday

5. Trade balance for August as well as consumer sentiment and G.E. on Friday.

Looks like nothing major in the works for Monday, so a possible 50-100 point gain.

Things could get interesting though from Tuesday on. Alcoa and Monsanto should both
have bad earnings. Who knows what the consumer credit data will say - and depending what's on the Fed minutes we may be heading down big time if there is no talk of a rate cut or just a 1/4 point cut.

Wednesday's pending home sales will not be good news, and will enforce what we already know about the housing market.

Thursday will be bad news with the jobless claims, unemployment rate will probably head higher. Lower gas prices mean lower profits for Chevron as well.

If we have a rally on Monday I think I will take a position to short for Tuesday. The market is already counting on a half point rate deduction at the end of the month. If it sounds like we will have it, the markets already have it built in. So there is, in my opinion more room for a downside risk. Having a 2.25 Fed rate now leads me to believe that we won't get .50 and instead we will get a .25 cut. To be honest I'm not sure that any rate cut will make a difference since the banks aren't lending anyway. We have all of next year to lower rates when it might make more sense. Plus there isn't much room left to lower it if we go down to 1.75.

I'll keep an eye on SKF as well. Remember we are heading into the heavy reporting period this month. It could easily define where the markets are headed. And I think we all have a good idea...

At the moment, the futures are down 190 points and Asia is down 2%-3.5%. At least right now, it doesn't look like there will be any rally on Monday. It's possible that we could be headed for a serious downward move. The consensus is there for it and the fear exists. The technicals may be screaming oversold, but as someone said on another message board I follow "Panic induced selling ignore all technicals." I completely agree.

The fundamentals have been lousy. Bad jobs reports, bad auto sales, and more expected bad news. The rate cuts are probably pointless, and I don't think traders are going to be satisfied getting a half point cut. I just don't think that is working in this market, and the proof is right before us.

Is this it? The moment?

The consensus I'm getting is a 5% to 9% drop from here. That would put us 35%+ off the highs. We should look at the big picture now, going decades back, to see how relevant a drop that really is. It's significant, but there have been larger declines. After the tech bubble the NASDAQ fell over 75% from peak to trough. Scary - we could be only halfway there!

I'm going to watch the markets carefully, but if it continues on this route I'll move to cash and possibly take a small position in an ultrashort etf.

Rojack, good post on this week upcoming news. I just want to point out that the futures on fed funds rate is predicting 100% chance of 0.50% cut at the next Fed meeting, 10/29/08. And Bloomberg shows Monsanto will report on Wednesday (not Tuesday). Although the chance of an emergency rate cut on Monday is low, I'm still hoping it could have sometime this week.

I doubt there's enough of an emergency to warrant a surprise cut. When they did it back on Jan 22, the world markets had 2 days to fall very hard while the U.S. markets were closed. I'm going to probably end up in cash, and sidelined.

Thanks Master 'O Fate - I may have read Monsanto wrong, I got it off of my Ameritrade account and might have got the day off while typing the info.

I hope we have a chance to buy some short ETF's tomorrow as I still like DXD and QID, looks like a major move in the works for them. Harry had mentioned that SKF looked pretty good as well. Read on MSNBC today that they expect another 100 banks to fail next year, plus Germany is taking some serious action to shore up their banking system. Looks bad for banks for awhile.

I have this feeling that we may have a series of three or four major down days in the making here. Fundamentals are weak and I have a feeling that the panic selling is about to start. I sold out of all my positions last week, thinking we might have a rally with the bail out so I'm 100% cash right now. Think I might go with 50% in DXD and QID at the open and hold onto the other 50% to see where we go from there. Futures currently down 147. Good luck.

Jack

Jack and Harry, don't forget that the SEC short-selling ban will be lifted this Thursday (which is 3 business days after the bailout plan was signed into law). This could drive the market down even more, unless there's an rate cut this week.

This bottom is going to be like: If you're not afraid to buy then it's not a bottom. We'll know.

Dave, I think you're right.

As it stands now the markets around the world are dumping pretty hard. I'm going to unload here because I think the markets could go into freefall mode. I prefer to be in cash. The conditions are so oversold yet the markets are dropping in rapid fashion. This may be the beginning of the real panic.....and it can certainly last more than a single down day. I'd rather take a hit up front of a few percentage points than slide into the negative double digitis....

looking at the vix above 45, we could get a multi month bounce after this low today, will be looking to go long the uyg soon.

FYI - the short selling ban has been extended until the 17th.

We still need the big flush - a really fast furious washout.. as it is now, longs are dying the death of a thousand cuts in the form of 1-2% drops. Before I go long with any degree of conviction, I'd need a 10-15% straight down, scare the bejeezus out of everyone, downdraft.. (Like October 1987) Otherwise we're just going to drift lower, slowly and painfully.

And it looks like Hartford was the insurance company Reid was talking about...

beancounter -

Agreed. I closed out of my longs (except precious metals) today while the DOW was down 200-250 pts, and now it's down 425 points. At 4% down, that is still insufficient. The VIX is at 52+ which is simply amazing, and could go even higher. Europe is down even worse than we are - by several percentage points! This is no longer about technicals. It's about reaching maximum fear and having the washout you mentioned.

I'm staying mostly cash and not going short. I don't know if the bottom is another 5% or another 20% away. And after the bottom is hit, there should be a sharp recovery of 5% to 10%. I don't mind just holding on to some precious metals here and most being sidelined.

Wow - down almost 600

For those interested, the VV numbers today are:

Buys=4 Sells=78 B/S=0.05 MTI=.33

Some of the lowest number in years. That said, in a real panic technicals and fundamentals tend to be ignored. It looks like we may finally be getting a bounce here, but the overall long term trend is still down.

Bringing back the macro view.. I understands harry's points on MTI.. but thinking that with all the write offs and money evaporation around the world, there are billions of dollars sitting on the sidelines with nowhere to go.
I think the psychology factor will kick in - first bit of good news from a quarterly report will send the market flying.
I don't think short positions are in order any more.. am I wrong?

Depends. Banks are still gettin hammered overseas. BAC just reported 50% decline eps and cuts dividend. Almost a bottom but no gap up today so far. Eurpean banks down across the board.

Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy

I'm thinking the same way - time to buy. With a coordinated global rate cut probably in the works we could see a short term bounce. Not that it will help much, but that's what the markets are calling for.

I'd like to contribute the following article that might give a little perspective, if not much immediate comfort

http://online​.wsj.com/artic​le/SB122333679​431409639.html

Hope some of you find it helpful in some way

L10

dirtyharry, what is the read from VV on today's massacre? Thanks.

for anyone following fibonacci at all...

If you look at the market high from 2000 and go all the way to the 2001 lows, on the S&P and the Dow we have broken through the .618 retracement and are heading to 100% (I have the figures at the office, but it's about another 26% down for both.)
The NAS just broke through the 50% and it's also heading a LONG way down as well.

I'm hoping that a coordinated rate cut will spur things back to life, but until we start seeing handcuffs on Armani laden executives I don't think anyone will believe anything.

This links to a fibonacci calculator that comes in handy

http://www.​nationalfutu​res.com/fibo​nacci_calcul​ator.htm?a=1​3930&d=0&b=7​197&johnpers​...0&e=.382&i​=.50&j=.618&​k=.786&l=1&m​=1.27&n=1.62​&nn=1.618&ll=​2&nnn=2.618&​johnperson7=​0&johnperson​1=0&ans=0&ans​1=0&ans2=0&a​ns3=0&ans4=0​&ans5=0&ans6​=0&ans7=0&an​s8=0&ans9=0&​ans10=0&john​person8=0&jo​hnperson2=0&j​ohnperson9=0​&johnperson3​=0&johnperso​n10=0&johnper​son4=0&johnp​erson11=0&jo​hnperson5=0&​johnperson6=0

MasterOFate:

Today's VV numbers are rather incredible......

Buys=2 Sells=83 B/S=0.02 MTI=.30

I believe these are the lowest readings ever for as much data as I have. What's more, is the short/ultrashort ETFs are included. This means there will always be some Buys, because if the market is crashing those ETF will be up, not down, and therefore generate a But signal. This might be almost the most extreme these numbers are capable of being.......but we'll see......

The Ultra Short [and long] ETF's are all we have left.

Can you say DOW 7,500? That does not have a ring to it!

moneyman, the 100% retrace to the dotcom lows is 7177 - and we've broken the .618 retrace already - Proability is high..

Turns out we could get more extreme:

Today, the figures are:

Buys=1.8 Sells=86.1 B/S=0.02 MTI=.27

By the way, the reason the Buys and Sells don't add up to 100% is because there are Holds that I'm not including.

Futures are up 200 pts at the moment........maybe this is the beginning of a little rally. I hope so, because my goal will be to short rallies more than going long at interim bottoms.

yes also the summation index is close to a multiyear low, and new high low line was at an all time low yesterday, we have held 2001 9/11 lows at 960 on sand p so should get a rally soon, of the 15% variety i think.