Both the Dow Jones Industrial Average and S&P 500 fell to near two-year lows the week of July 7, 2008, and have now declined more than 20 percent off their peaks. Welcome to the bear market! My advice given the way things look now is to sell rallies until we see major change.

You can’t ignore the fundamentals. The economic data last week overall pointed to stagflation, defined as lower growth, and higher prices. That’s a dangerous situation, and difficult to control.

Of course, the possible collapse of mortgage lenders Fannie Mae and Freddie Mac has stolen headlines, in addition to the failure of IndyMac Bank. The banking system is fragile, and the subprime fallout seems to have more ways to go. The Federal Reserve has opened the discount window to Fannie and Freddie, and the Treasury has said it will buy part of their equity, if need be. Treasury Secretary Paulson asked Congress for authority to buy unlimited stakes in the companies and lend to them.

Looking at stock index futures, The September S&P 500 index closed lower on Friday, July 11, as it extended this summer’s decline to a sixth straight week. From a technical standpoint, momentum indicators, Stochastics and the Relative Strength Index (RSI), are oversold but remain neutral, signaling that sideways to lower prices are possible near-term. If September S&P extends this summer’s decline, monthly support at 1229 is what I see as the next downside target.

Closes above the 20-day moving average at 1293 are needed to suggest that a short-term low has been posted. For day traders as we kick off the week, I see the market force as neutral. Watch for stabilization today and a possible bounce/rally attempt up toward the 1264 area, the 10-day moving average. Holding 1247 in general is a sign of stabilization for higher move to come. The News Freddie Mac/Fannie Mae bailout news is aiding market sentiment this morning, and S&P futures were last trading up 7 at 1246.75.

Turning to crude oil, the market saw a volatile week, down $9, up $9, and peaking at a new all-time high yet again. News out of Iran seemed to be worth about 50 percent of the moves both directions. Leaders said Iran wouldn’t attack Israel and would ease up on their nuclear program, then they turned around and showed evidence of missile exercises, sending crude oil back up. Iran was talking out of one side of its mouth, then taking actions to the contrary. If the dollar can gain some strength on the Feddie/Fannie bailout, we might see crude oil retreat a bit, but geopolitical news can cause volatile moves at any time.

Good luck and good trading!

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

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