Wednesday, October 08, 2008

One time machine needed - preferably used.

Another chair slam for the markets, particularly for the Russell 2000 which had been a model of strength as recently as mid-September. No question - stochastics are oversold now after earlier declines had kept them out of danger territory. The snapback zone is Fibonacci retracements, but based on my earlier thoughts I suspect we are not done to the downside, so these figures may be revised over this week and next.

Volume was disappointing given the scale of losses and if there was a modicum of comfort it came from the transports which held Monday's lows as support. There is a stronger broadening wedge pattern at play, but much of its potential is based on it's support holding - something which similar patterns in the other indices have failed to do.

I suspect Transports will be one of the leading sectors out of this slump given oil prices look cooked (along with inflation - for now) and transports are a traditional leading sector following a recession.

There were some incredible readings in the McClellan Oscillator - another cue for a major bottom in the making.

But the reason to remain skeptical is the Summation Index. It's oversold - but historically has been lower. Given the new all-time lows flashed across other breadth indicators I am surprised this has been so resilient.

Extremes in the TRIN haven't produced the powerful rallies one may have expected

We are looking at the first step of a major 4-year cycle bottom (the second step is likely to occur next summer when this low - whenever it gets made - is retested). It is a time for optimism as this confluence of conditions have not been seen in some time. I am no economist so what follows may be the voice of the ignorant, but when the markets made their low in January and breadth indicators reached the extremes that they did I felt the market had priced in a Joe Soap recession. What we are seeing now is the markets pricing in something worse. What will emerge with any level of credibility is now the big question. I suspect areas to do well will be Transports, Technology, Regional Banks, Medical Devices and Pharmaceuticals.

Anyone got a time machine so we can find out what to buy?

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website