Congress passed the $700 billion financial bailout last week, but the enthusiasm in the stock market was short-lived. People are worried about the price that will have to be paid, and the possibly of a not just a small recession, but a big one. Economic data is gloomy, and the stock market is taking a hit. The S&P 500 is now down about 25 percent on the year. This thing is ugly, and technicals are signaling further possible losses.
You could summarize last week as a flight to quality. The markets are in fear mode. As stocks slid, the three-month Treasury bill rate fell to levels not seen since World War II ( hitting 0.0203 percent on September 17). The dollar rallied on ideas we in the U.S. are better off than in Europe, which is now feeling fallout in its financial sector. It looks like interest rates will need to be cut abroad as the need for government bailouts has spread to Europe. In Germany, commercial property lender Hypo Real Estate was the latest bailout target, and fears of massive bank withdrawals led Chancellor Angela Merkel to say the government will guarantee savings of private account holders.
Dollar Index futures, which represent the dollar versus a basket of global currencies, rose above 81, the highest since Aug. 22, 2007. Gold has surged anew amid a safe-haven bid, with December futures up more than $40 an ounce this morning. Meanwhile, crude oil futures have tumbled, trading under $90 a barrel on ideas global demand will slow along with the global economy.
The December S&P 500 index closed lower on Friday and was down 9 percent for the week. Momentum indicators, the Stochastics and the Relative Strength Index (RSI), are bearish, signaling that sideways to lower prices are possible near-term. Closes above the 20-day moving average at 1200 are needed to suggest that a short-term low has been posted. I don’t think we’ll see that. First resistance is the 10-day moving average at 1173, and I don’t think we’ll see that either.
For day traders, I see the market force as bearish. Watch for 1084 as a key pivot. If the market can hold above 1084, it can start to stabilize and bounce today. Below 1084 signals a move to just above 1065 as next support. Use caution on early rallies or sell-offs that move “too fast too soon,” which could bring a failure of that move later in session. If you are unsure if this a capitulation-type panic, stay on the sidelines. Exercise caution.
Good luck and good trading!
Please feel free to call me at 866-231-7811 or contact me via email at jfriedman@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.
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