On A Short-Term Basis – Support Is Near – Place Stops On Bearish Positions!

October 7, 2008
Author: Peter Stolcers, Founder of OneOption

European markets tanked Sunday night and they set a negative tone for our markets yesterday morning. European banks met today and the likelihood of a multination European bailout is minimal. During today's conference, Germany didn't even attend. It appears that each country will resolve its issues independently on a "one-off" basis. We've already witnessed the difficulty in getting a bailout approved for our country, imagine the dissension over there. The ECU structure could be in trouble. The market is continually looking for the next life raft and it currently wants a rate cut. Specifically, it wants a coordinated interest-rate cut between major industrial nations. The market has priced in a rate cut for this month's FOMC. I don't believe that lower rates will solve the current problem, but I guess it can't hurt. Today, the Fed announced that they would be purchasing secured and unsecured commercial paper. They are doing everything they can to pump cash into the system. Credit spreads have stopped going up today and that is an encouraging sign. The market staged a nice intraday reversal off of the low yesterday, but it did not have the impetus I would like to see. Ideally, it will reverse from a deep decline today and actually finish in positive territory. Tomorrow, I would like to see early momentum will carry it to a higher close. This type of price action could come very quickly and it would mark a short-term bottom. I might be a week early, but I feel we are close. SPY 100 is a psychological support level and we almost touched it yesterday. That represents a 33% decline from the peak and it is statistically significant. The head and shoulders formation on a six-year chart reveals the neck line is equidistant from the peak and today's market level. That is another measure that tells me we are close to a support level. Sentiment indicators (bearish sentiment, VIX, put/call ratios) also favor a short-term support level. Fundamentally, stocks represent a good value. Unfortunately, cash is the biggest concern and all of the other metrics don't really matter until the liquidity crisis has been resolved. I am scaling into stocks that have been destroyed. I want to see an established support level and I'm looking at companies that are not dependent on financing (strong balance sheet) or strong economic conditions. Agricultural stocks and technology stocks are two examples. In the Live Update table, I have taken the restriction off of bullish stocks. They do not have to show a cumulative positive net change for the last three days to make it on the list. All of our bullish stocks are listed in descending order with the largest dollar gainer at the top. I've done this so that you can easily spot the strongest stocks on our list if a reversal materializes. On a short-term basis, I think the bears are getting tired and the deeply oversold condition will keep prices above yesterday's low. After testing the downside, I expect to see a rally near the bell. image

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