The Market Whispered (10/24/08)

The overnight Dow future & SP500 future went limit down in reaction to the selloff in the Asia markets, and lot of people are anticipating a very negative opening on Wall Street, i.e. down 700 - 1000 points. Well, it didn't turn out to be as bad as many expected. The market did went down over 500 points shortly after the open, but it recovered over 200 points within the first half hour of trading. The market was only down less than 200 points with one hour left before the market close. Then the market sold off nearly 200 points in the last 15 minutes of trading and closed with a loss of 312 points for the Dow, SP500 down slightly over 31 points, and the NASDAQ loss nearly 52 points. In any other day when the Dow closed down 312 points, it would be interpreted as a bad day. But with today pre-market events of limit down on the Dow & SP500 future and global market selloff, a 312 points loss day for the Dow is looked upon as not such a bad day, since the expectation was for a lot worst.

So what did the market actually do on Friday, October 24, 2008 other than finished with another down day and disappointed those that were looking for capitulation. First of all, the major indices other that the NASDAQ still have not tested the intraday low of October 10,2008. The NASDAQ has tested twice, yesterday and today. In both test, the NASDAQ ended with a close above the intraday low. The other thing that the market has done was all the major indices closed with a new low, lower than the October 10, 2008 closing low. This is significant for those that subscribed to the Dow Theory. For those readers that are not familiar with the Dow Theory, here is a very simplistic interpretation. Whenever the DJIA makes a new high with the DJT also make a new high, then the Dow Theory state the new high is a confirmed high and a higher high for the DJIA is still yet to come, and vice versa for a confirmed new low. Therefore, with the Dow closing at a new low on Friday, and confirmed with new low by the DJT, the market has whispered to inform us a lower low is yet to come. Having the SP500, NASDAQ and other indices also making a new low reinforce what the Dow Theory is indicating. For those that are seeking confirmation of the market bottom might have interpreted the Dow and the SP500 holding above the October 10, 2008 intraday low as a sign that the market has made a bottom will missed what the market has just whispered.

Since the Dow is still trading inside this bearish wedge formed with the October 10, 2008 intraday low as the support and the trendline made by connecting the intraday high of 10/3/08 and 10/14/08 as resistance (see chart),



and with the expectation a new low yet to come, my trading strategy will be as follow:

- Wait for the market to break and close below the 10/10/08 low. If this new low is another confirm low by the Dow Theory, then go short by buying the inverted ETF for the Dow, SP500, NASDAQ (DXD, SDS, QID)

or

- If the market rally without breaking below the 10/10/08 intraday low, wait for the rally to hit resistance, then go short by buying the inverted ETF for the Dow, SP500, and the NASDAQ (DXD, SDS, QID.)

I will not go long on the market during the bear market rally if that is to occur. The primary trend is still down and the risk of a trap is too great at this juncture to go long. Of course, if there are good opportunities to do some day trades on some badly beaten down stocks, I will nibble on some of those trading opportunities with much reduced position size.