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Market Action: Lower Lows and Lower Highs - Not Good

October 27, 2008 6:10 PM

toytrain.jpgI thought the market would remain in a tight range before the Fed cut Wednesday. While this still may be the case, we continue to make lower lows and lower highs on the SP. This is not good. True buyers (not traders) are not being rewarded for being long the market. They are gradually losing ground each and every day.

With that said, the only thing holding the market here is the Dow low. I have mentioned many times that I do not consider the SP low a valid low and believed it had to clear - eventually. We may see it clear soon, possibly tomorrow. I believe the game of buying above the Dow low will likely continue however. If it clears, we HAVE to reverse and go positive. If we cannot, we will likely see panic selling into the close. The market may attempt to hold the 2002 low. That would be a logical place to hold next step down.

The most obvious next support on the Dow is about 5900. Yes, I know, that is far, far lower, but that’s what I see on the charts. This is also probably why Cramer made the comment that the Dow could fall all the way to 6,000. Do not be the Lone Ranger here if we clear the Dow low and be buying some concept of “value”, IMO. The market will tell you what it considers value, and what it doesn’t.  The recent action suggests that it does not consider the 8000 area as value relative to the downside risk we are facing. But one thing at a time - the Dow low has to clear. The fake toy train of an economy could get far worse and we might be wishing the market was at 8000 soon enough.

In addition, I also firmly believe that the eventual low will be made once volatility subsides. The end of bear markets generally do not come on massive moves off a low but rather finding a bottom over time. Those are tradeable lows, not ultimate lows, IMO. This is why I believed that these lows would eventually be proven to be a bear market rally off a temporary low on the way to further downside.  Look at 2002 for an example. The market made huge moves to the upside periodically, but they all failed. Once the market finally stabilized and volatility subsided, we found a bottom. There are reasons for this, but one of them is confidence and a reduction of fear. Traders often mention that the time to buy is when fear is greatest. While this may the case for a trade, I would strongly argue that is not the case for long term investing.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

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