Ok, now that we have confirmation that the no inflation theory was a lie, the bad news continues to mount. The University of Michigan's Consumer Sentiment Index fell from 76.9 in September to 75.4 in October. In reality, we do not need economic data to confirm what we have been experiencing everyday as consumers. The more important question is; what is the market going to do about it ? Let's cut to the chase.
As far as the S&P is concerned, I told you that the 1180 area was the first line of support. Whether it happens or not, the market is attempting to scare investors with one of its nororious panic sell-offs. These sell-offs cause the less informed investor to give into their weaknesses and sell. These so called washouts (technically called:capitulation) are followed by dramatic reversals that begin new trading rallies.
The 1160 mark on the S&P represents a 50% retracement of the bear market decline of 2000-2002. It is at this level(if reached) that the market should attempt a reversal. Of course, if everyone is waiting for it to happen, it may not. This is why it is important for traders into year-end to begin building equity positions now. Remember, the year-end rally is for traders. By this definition, you will be a seller by year-end or before.
On the Dow, a sudden drop below the 10,000 is similar to the S&P's key reversal point at 1160. The NASDAQ, appears as oversold as the other two indexes, but a break below the 1975-2000 level can bring the washout down to 1875.
Will any of this happen ? I don't know. But if it does, you now know at what area's the reversals (rallies) can begin. If you are waiting to catch the bottom (if it even occurs), you have to be very quick.
