Sam Collins

Scraping the Bottom of the Bear?

by Sam Collins   10/07/08

European and Asian stock markets were sharply lower before U.S. markets opened Monday, with the DJ World Index (excluding the U.S.) falling 7.3% and Europe down 7.6%. So when the New York Stock Exchange opened for business, sellers overwhelmed the system, driving stocks down 300 Dow (DJI) points in the first 30 minutes of trading.

Fear of a rapid and deep worldwide recession was the reason for the selling, and at one point in the late afternoon it looked like the selling would turn into a rout when the Dow plunged more than 800 points. That is a new intraday record for a decline and it followed Europe's biggest one-day fall.

But later in the afternoon, France proposed a meeting of the G-8 Summit and that increased hope that the global banking system would cut interest rates.

With that, a thread of hope for the markets appeared and just before the close took back more than half of the day's losses in just 70 minutes. Even so, the Dow (DJI), the S&P 500 (SPX) and the Nasdaq (NASD) fell by 3.5%, 4.3%, and 3.8% respectively, and the Dow Jones Industrial Average closed under 10,000 for the first time since Oct. 26, 2004.

Large financial stocks took a hit again with National City (NCC) off 27.1% following a downgrade by Fitch; Wells Fargo (WFC) was down 2.7%, and Citigroup (C) fell 5.1%.

At the close the Dow (DJI) was down 370 points to 9,951, the S&P 500 (SPX) fell 42 points to 1,057 and the Nasdaq (NASD) fell 84 points, closing at 1,863.

The New York Stock Exchange traded 1.9 billion shares, with decliners ahead of advancers by 15-to-1, and on the Nasdaq 1.5 billion shares traded with decliners there ahead by 6-to-1.

Crude oil (November contract) was down $6.07, closing at $87.81 a barrel, and the Amex Energy SPDR (XLE) fell $3.12 to $54.89 -- the lowest since October 2006 -- where a double-bottom support may exist.

The December gold contract jumped to $866.20 per troy ounce, up $33, as the world ran for cover to the traditional safe haven in times of crisis. The PHLX Gold/Silver Index (XAU) fell $6.86 to $105.23, breaking a double-bottom but also reaching extremely oversold numbers.

What the Markets Are Saying

Monday's panic sell-off with heavy volume and huge downside breadth drove the CBOE Volatility Index (VIX) to a new all-time intraday high of 58.24, and along with that it sliced through major support zones that in some cases took years to establish.

One of those was the January 2004 to November 2004 zone at S&P (SPX) 1,060-1,163 with the key Fibonacci 61.8% number at 1,078. But as noted last week, a clean sudden break through zone after zone of support means that the market is in freefall, so zones that would normally provide stability, instead, give way under panic selling.

Yesterday's low of 1,008 reached a number not seen since August 2003, and the late-day bounce brought the final number to 1,057, which is startlingly close to the bottom of the November 2004 low of 1,060 (see above) with its Fibonacci 61.8% number of 1,078. On Monday, I said that this area is important and that the sell-off could "possibly even reach 1,000 before the market finds its ultimate bottom."

But I did not expect that 1,000 would almost be hit in just one day. So does yesterday's low mean that we've hit bottom?

If a full-fledged round of heavy volume buying occurs this week I would say that the chances are good that yesterday's low at 1,007.56 will turn out to be the bottom of the bear.

But if yesterday's low is penetrated, then the ultimate bear-market target will drop to the triple-top breakout from the reverse head-and-shoulders formation that marked the bottom of the last bear market -- that number is 944, with a possible intraday extreme of 846.

Today's Trading Landscape

Earnings to be reported include: Acuity Brands (AYI), Alcoa (AA), Cantel Medical (CMN), Navisite (NAVI), Premier Exhibitions (PRXI), Sealy Corp (ZZ), TeamTech Global (TEAM) and Yum! Brands (YUM).

Economic reports due today: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Oct. 4, Redbook Retail Sales Index for Oct. 4, Sept. 16 Federal Open Market Committee (FOMC) minutes, August Consumer Credit (the consensus expects 6 billion) and the ABC/Washington Post Consumer Confidence for Oct. 4.

General Motors (GM) said that it has halted production in most of its European assembly plants. European markets stabilized as talk of a global cut in interest rates is anticipated, and it appears that Australia will be first with an announced cut of .5%.

---

Get Sam Collins' Daily Trader's Alert e-mailed straight to your inbox each morning before the opening bell absolutely FREE!

In addition to getting instant access to his Daily Market Outlook, you'll also receive, in the same e-mail, his Trade of the Day so you can start your day off right by positioning yourself for profits!

Click here today to sign up today for Sam's FREE Daily Trader's Alert!

Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.