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Index Wrap

Bottomless Pit

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        WE 9-7           WE 8-31          WE 8-24          WE 8-17
DOW     9605.85 -343.90  9949.75 -473.42 10423.17 +182.39  -175.47
Nasdaq  1687.70 -117.73  1805.43 -111.37  1916.80 + 49.79  - 89.24
S&P-100  553.89 - 23.51   577.40 - 29.31   606.71 + 12.84  - 17.54
S&P-500 1085.78 - 47.80  1133.58 - 51.35  1184.93 + 22.96  - 28.19
W5000  10066.49 -448.60 10515.09 -433.32 10948.41 +188.32  -234.36
RUT      445.19 - 23.37   468.56 - 12.25   480.81 +  5.16  +   .13
TRAN    2713.14 -100.27  2813.41 - 40.98  2854.39 + 29.74  - 36.12
VIX       34.36 +  6.51    27.85 +  5.56    22.29 -  4.45  +  3.93
VXN       65.45 + 12.59    52.86 +  5.16    47.70 -  4.32  +  3.50
TRIN       1.25              .71              .70             2.67
TICK       -113              -74              351              201
Put/Call    .84              .82              .56             1.07

Bottomless Pit
Austin Passamonte

People are losing jobs? You're kidding! That seemed to come as a shock for many economists today when unemployment rates spiked to 4.9 last month. Sure surprised the all-knowing "Markets" as GLOBEX S&P futures dove from +4 to -13 in minutes after the news broke.

Now, here's a little quiz for you. Has your local newspaper mentioned anything about layoffs and job losses lately? I just drove from Denver, Colorado to Corning, New York and back in the past two weeks. Every single paper I read along the way was plastered with layoffs news. Where in the world do these market economists come up with their estimated projections? Same math Abbey Cohen derives 1500+ for the SPX by year's end?

My word.

Anyway, trading the past few sessions has not been easy. You'd think that simply buying puts and hunkering down is the answer and that's exactly right. However, buying gap-down opens and holding stops thru turbulent times is not an easy feat to pull off. Traders with sizeable accounts who take a small percentage of their capital, buy puts and leave stops out of the equation have done very well. We tried that simple concept in IS with disastrous results. Countless emails from readers who overspent their accounts, used no stops and got crushed taught me the limitations of website suggestions on this one.

Other than that and possibly spread trading, it's been one volatile ride this week. The summer action was slow but we did have some deliberate days to trade. Today was the most methodical of these past four in September and it was wild enough. Day traders can make some money as tonight's articles depict but it sure ain't easy.

Beyond that, when will this incessant selling cease? Or will it?

(Weekly/Daily Charts: NDX)

Of all the indexes I see the NDX looks most solid if we dare use that relative term. Make no mistake, this index will not see 3,000 for a long time and historical highs are several years ahead if bulls are lucky. But I'd say most of the bleeding is over with for now and it should be, considering from whence price action came.

The weekly descending channel from April remains firmly intact and price action closed on the bottom line of support. Not to mention right near intrasession lows from late March. These are two points of converging support that may give bulls reason to buy.

Stochastic values are both trying to turn bullish and we see bullish divergence in the weekly chart as well. Higher stochastic lows and lower price lows are incongruous, and any divergence within oversold extreme is bullish by nature.

Techs may hold the line for now.

(Weekly/Daily Charts: Dow)

The Dow is a different story. Weekly chart stochastic values barely budged as the Dow shed -600 index points from weekly highs to the close. Daily chart signals made a bearish cross on Friday in oversold zone as one would expect on a day like that as well.

My guess? The Dow won't find a near-term bottom until the 9,400 to 9,100 area although we are subject to bounce from here at any time. Next significant resistance lies back up there at 10,000 level for now and 9,900+ will be a tough hurdle before that.

As we've said here for months now, the Dow has much more downside risk than the NDX and we will likely see that by the end of this year and possibly beyond.

(Weekly/Daily Charts: OEX)

The OEX broke below the weekly channel and fights for support, where it found a smidgen of help at the April intraday lows. We see stochastic values about to turn bullish but 580 area is firm resistance above.

(Weekly/Daily Charts: SPX)

Same with the SPX, which sits on 100% retracement of April lows as well. We can flip-flop the OEX and SPX with these different studies and see the exact-same thing, which is why I mixed up our tools. Note how several different measures arrive at similar predictions of support and resistance ahead.

If the SPX manages a pop to 1140 next week it will meet firm rejection at that level for sure.

Shorts Will Sell
Matter of fact, every rally attempt will meet heavy selling until otherwise thwarted. Markets are poised for a blow-off rally and we'll soon see one but shorts will cover at low levels, watch prices blow up the charts and start shorting again. Momentum traders have now switched sides and they swapped horns for claws.

But that works both ways. Selling the rallies when buyers decide to buy will result in staggered short-squeeze moves up the charts. Buckle up kids, because it will only become more volatile from here going forward. I find it impossible to believe we can see sustained upside action heading into another pre-warn season and will look at any rally for the first signs of failure myself.

The Fed is dead and any surprise interest rate cut would not hold markets up beyond a couple of sessions. Bulls waiting for the economy to turn or even signs of that happening will be sitting in cash far longer than they plan. That will not be the catalyst for our next upside burst. Something unknown right now tonight will ignite the short-squeeze tinderbox and give us the next failed rally.

Which leads me to my closing thought. Mega-bull Larry Kudlow of CNBC ilk gets airtime every month and pounds his pulpit for the Fed to slash rates beyond belief. Given his way he would take rates down to zero. Would that really boost the economy? I wonder.

Here's a fact to ponder: much of this nation's wealth lies in the hands of our senior citizens. Remember them? They were the last generation to date that actually saved some money. The rest piled it into NASDAQ bombs and no longer feel the wealth effect. But many seniors are invested in CDs and bonds. Instruments that were throwing off 7.0% interest now yield half that or less at every subsequent FOMC event. What does that do for these senior's future buying power?

Think about it. Tech stocks are now dead for years, unemployment is rising, housing values are falling and poised to plummet soon. One remaining source of untouched liquidity in the hands of consumers was CDs & bonds and now Larry K. pleads for slaying them to save the mighty bull? And what if zero interest rates work as well in the U.S. as they have in Japan for the past ten years? Then what?

Expect Aunt Millie to give you some nice knitted slippers this Christmas instead of Wal-Mart items so she can ration the savings for bingo. Uncle Merle will slap some duct tape and coverall paint on the aging Chrysler and roll up a few more miles than he planned to. Retail or auto stocks, anyone?

Summation
The long-term trend looks to remain down, but we are poised for a blowoff rally in relief quite soon, probably straight ahead. No matter how many days, weeks or hours it lasts the next great selling opportunity lies beyond that as well.

Don't fall in love with either direction right now!

Best Trading Wishes,

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