S&P 500 Violates Key Support on Heavy Volume

Thu 11/20/08 (SPY @ 75.45) You know what they say about catching a falling knife... The S&P 500 (I use the SPY as a proxy since that is what most of us trade), plunged through the ice after bouncing off it 3 times. It was a decisive, high volume penetration and the nearest support would take us back to the lows of 2002-3.
A breakdown of the sector action reveals that the story was overwhelmingly energy and financials. There has been clear capitulation in the latter, but the former makes little sense on a long term fundamental basis. We are not, despite the pledges of the Obama administration (how I like writing that!) going to stop using fossil fuels anytime soon, or if we aren't, China won't, so I imagine once this panic (and I continue to believe it's just that) passes, energy will surge again. If you have to back up the truck and buy anything, but XLE.
But right now, keeping your powder dry is prudent. If you reentered near what seemed a market triple bottom, no problem. Take your losses, get flat again and wait for a reentry point, which now would be a decisive close above those lows (in the 84-85 area).
This is what bear markets feel like. Capitulation, a sense of panic, everyone taking out companies, good and bad, and shooting them. Some deserve their fate; most don't. Choose the survivors which are starting to trade as call options on the recovery of the American economy and you should do very well, perhaps not in the next few months but certainly in the next few years or decades.
By the way, if you were using a trailing 20 day buy stop to reenter the market and a 20 day sell stop to exit it, you would have been SHORT THE SPY SINCE 125 with no false buy signals on the way down!! That's a 50 point open profit! The current buy stop if you are using this system is 100.86 but will probably drop soon.
If you are very squeamish at this point, you may want to lighten up, but immediately put in a buy stop order (or else you will be too scared or distracted to reenter the market), adjusting as the market declines.
Caveats: today is options expiration so that may have had something to do with yesterday's volatility and high volume. Sometimes markets snap back in the opposite direction the Monday after. Stay tuned.

Has the S&P 500 Bottomed?

11/13/2008 Today the SPY (@ 91.17) formed what may be a climax low:

1. The market made a new relative low, but closed higher - this is known as a KEY REVERSAL DAY.
2. It did this on VERY STRONG VOLUME.
3. It was an upthrust day with an extended advance and wide range.
4. It found support right at the low of mid- and late-October (at around 83).

Fundamentally, the news is awful which does not rule out a significant rally or even bear market low. Remember that the market often advances several months before the fundamentals of the market start to change.
Yes, we are in uncharted territory and the market could certainly go lower, but we have muddled through past financial crises and will muddle through this one. I do not know if the market will be higher 6 weeks or even 6 months from now, but I would be surprised if those who did not buy around these levels will not be kicking themselves 5-10 years from now. Remember that if the market is down 40% from its peak, you are almost doubling the effective future returns of any dollar invested at these levels versus the same dollar invested at the market peak.
Stay tuned, but I am growing cautiously bullish.
Two factors almost no one is discounting is that 1.) the plunge in crude oil and gasoline has led to trillions of dollars of relief to the consumer going forward and 2.) President Elect Barack Obama's coolheaded approach and return of fiscal responsibility will probably inject some much-needed confidence into our system. Contrary to popular belief, markets perform much better under Democrats than under Republicans, particularly if those Democrats are centrists, as Obama is (despite McCain's misinformation to the contrary). If he stays true to his pledge to end the occupation of Iraq, this should add hundreds of billions to our economy going forward, probably lead to a stabilization in the region as the intensely unpopular American experiment in Iraq ends, and will further dampen oil prices going forward.