The S&P 500 may have formed an intermediate term low, but the evidence is in favor of more declines although rallies over the next few days may not be unlikely. Click to enlarge.
Despite the dramatic surge yesterday in response to a Fed discount rate cut and promises of more liquidity if needed, the trend of the market remains down. August has recently become one of the weakest months of the year and of course it is followed by the worst month, September. It was strange to hear the Fed speaking of infusing tens of billions into the market to keep them functioning after they had declined less than 10% from their peaks at the point of the announcement. It leads you to wonder what they, and the European Central Bank, know about the balance sheets of the banks and other financial companies that are reeling from the mortgage implosion.
Markets hate uncertainty and it's quite clear that "when in doubt, sell" is the order of the day.
Note that the market formed a significant high in June, then broke its intermediate term uptrend line, then made a slightly lower low in mid-June. It seemed to break out in July, but that breakout failed badly - always a bearish sign. The subsequent breakdown below its trailing 20 day lows (one of the most robust trading signals I am aware of) seems to confirm the downtrend.
I expect much volatility up and down and lamentation followed by headlines declaring the worst is over. Don't believe it until the charts confirm it.
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