Sam Collins

Watch Volume for Bottom Signals

by Sam Collins   10/24/08

It was just another normal day on Wall Street -- with the Dow Industrials (DJI) swinging 550 points from low to high, as it traded triple-digits three times in different directions. And while the Dow ended more than 2% higher and the S&P 500 (SPX) gained better than 1.25%, the Nasdaq (NASD) fell 0.75%.

One of the reasons for the volatility was oil, which has fallen by more than 50% from its high of just three months ago, but which gained 1.6% yesterday and pulled some of the energy giants up with it. The Dow Jones Industrial Average (DJI) benefitted from ExxonMobil's (XOM) and Chevron's (CVX) gains of 9.0% and 8.2% respectively. We also an 8.4% jump in the beleaguered aerospace manufacturer, Boeing (BA).

Home foreclosures increased by 71% in Q3 and, as a result, financial stocks ended lower; MGIC Investment Corp. (MTG) fell 34.7%. Dow Chemical (DOW) rose 10.5% after beating Q3 earnings estimates by 6 cents. And after the close, Microsoft (MSFT) reported that its Q1 earnings beat estimates but it lowered guidance to $2 - $2.10 a share from $2.12 - $2.18 that it projected earlier.

At the close, the Dow Jones Industrial Average (DJI) rose 172 points to 8,692, the S&P 500 (SPX) was up 11 points to 908 and the Nasdaq (NASD) fell 12 points to close at 1,604.

The New York Stock Exchange traded 1.7 billion shares and the Nasdaq did 1.3 billion shares, but on both exchanges decliners were ahead of advancers by about 2-to-1.

The December crude oil contract climbed $1.09 to $67.84 in anticipation of the OPEC meeting early this morning (during which members did cut production). The Amex Energy SPDR (XLE) rose $2.35 to $46.55.

Gold for December delivery fell, intraday, to below $700 per troy ounce for the first time in 13 months. At the close, the contract was off $20.50 at $714.70. The PHLX Gold/Silver Index (XAU) closed at $67.93, off $3.76.

What the Markets Are Saying

Because of the Asian and European overnight sell-off, I think it's necessary to review where we have been, where we are and where markets could go.

After an impressive rally on Oct. 13, that set a new daily point record, many investors were looking for a continuation of the buying after a brief hesitation. But in two days, they saw stocks plummet again for a quick test of the Oct. 10 low of S&P 500 (SPX) 840. The decline was finally halted with a nice reversal on Thursday, at a close at 946, and an intraday low just 26 points shy of 840, so the test was a success.

Fear readings hit record numbers last week, with the CBOE Volatility Index (VIX) reaching a new all-time intraday high of 81.17. This would normally be considered a positive, indicating that the market is in a final purging phase, which could soon result in a bottom.

But one of our favorite sentiment indicators, the American Association of Individual Investors, suddenly flipped a week ago from all-time high bearish to bullish, and then this week was reported as 38.74 bullish and 38.74 bearish! Not good.

Earlier this week, I pointed out that the three tops (in as many days) at S&P 500 (SPX) 985 represented major resistance and the top of the current trading range 866 to 985 on the S&P 500. The next support zone is from the October low at 840 to 866.

We will soon see a final bear market low -- which can only happen when investor confidence has been destroyed. Consider that the S&P 500 is off 23% in one month, a decline which in itself would be a bear market, and it's off 43% year-to-date from its record high close of 1,565.15 on Oct. 9, 2007. The Dow Industrials (DJI) have been down 13 of the last 17 sessions and four of the 10 biggest drops in the Dow occurred this month.

This morning, the equity futures markets are "limit down," which means no trading in futures with the possibility that equity markets could be much lower.

Obviously, the lows of Oct. 10 (of Dow 7,774, S&P 840 and Nasdaq 1,534) will be tested today and likely penetrated. But this global panic sell-off will most likely provide the bottom that we have been looking for.

If the Oct. 10 low is penetrated by a lower close today, then the next support is at around Dow 5,560 and S&P 670. But instead of focusing on support numbers, we should direct our attention to the big money's response to this sell-off. If we see a sharp high-volume buy-in, then the chances are excellent that the bottom will have been set.

Today's Trading Landscape

Earnings to be reported include: Acme United (ACU), Active Power (ACPW), Alexander & Baldwin (AXB), Cache (CACH), CNA Surety (SUR), Escalade (ESCA), Exelon Corp (EXC), First Financial Holdings (FFCH), FNB United Corp (FNBN), Fortune Brands (FO), Gannett (GCI) and Horizon Lines (HRZ).

Idexx Laboratories (IDXX), Ingersoll-Rand Co Ltd (IR), ITT Corp (ITT), Standard Register (SR), T. Rowe Price (TROW), The Timken Co (TKR), UST (UST), Viad Corp (WI) and Western Alliance Bancorp (WAL).

One economic report is due, the September Existing Home Sales (the consensus expects 0.4%).

Fears of a global recession have led to forced liquidations resulting in a massive sell-off in Europe and Asia. London's FTSE is down 8.7% and Japan's Nikkei is down 9.6%.

The Dow (DJI) and S&P 500 (SPX) equity futures are limit down -- which means no trading. The S&P 500 futures can't fall below 855.20 before the stock exchanges open. OPEC has cut production and the U.S. dollar is at a two-year high versus the Euro.

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