Thursday, November 6, 2008

False Breakout?

The rally we saw on Tuesday, which appeared to be a breakout moving the markets higher, seems now to have been a false breakout. Yesterday's total market downturn, another 90% down day on the NYSE, was followed by an additional downturn today. From a technical standpoint, the downturn on Wednesday could be seen as a pullback, but today's results seem to indicate that the market may be reversing direction and going back to test the lows of October 10th and 27th. The support level for the S&P 500, for instance, had been considered to be at approximately 930. As of this writing the S&P has broken through that level and is at about 904 (down over 48 points for the interday). In a similar fashion, the support for the DJIA had been considered to be at about 8900 and as of this writing it is at 8696. Historically, the market tends to backtrack and test its lows before rising on a consistent basis. This movement of a rally period followed by a pullback period can take several months after it appears a bottom has been formed in the stock market. I would not be surprised to see the DJIA go back and test, or break the low of 7882 set during the day on October 10th. We will see. For now it would not appear a rush into stocks is a good idea.