With the Federal Reserve cutting the discount rate 50 basis points to 1%, it remains to be seen if this will loosen up the credit markets. There remains a great deal of mistrust among banks and borrowers at the present time, and until that changes, we would look for the economy to limp along
The sharp move up, in both the DOW and the other indices on Tuesday was a sharp counter trend rally to what remains a prolonged bear market. One day does not make a trend, and we will not know for some time if the lows we have seen recently in the past month are going to be the final lows of this bear market.
One bit of data came out today can finally put to rest the argument whether or not the US is in a recession. Today, GDP numbers showed a .3% contraction in vs. the same period 1 year ago. Any contraction in the GDP meets the formal definition of recession, which is exactly our current economic state.
Our gut feeling is, that we will see more sideways action in these markets for some time to come. We would not look for any dramatic upside action in stocks. If we do see a further rally from current levels, it would be perfectly normal within the confines of a bear market. If you are inclined to trade these markets from the long side, I suggest doing so with a slightly smaller position than you would normally trade. We expect the volatility level to subside from its current torrid pace and fall back to a more normal level as we move sideways.
The judicious use of a game plan and money management stops is highly recommended for everyone. These markets can cut you into pieces in hours mainly because of the market’s inability to fashion out a firm trend either on the upside or downside.
Just because the market is going sideways does not indicate that all is over on the downside. The longer we see these markets move sideways, the greater the opportunity that we may be building a base to carry the markets higher.
Chart Notes:
Below is the weekly chart of the S&P 500. Even with the current "rally," nothing has changed. The downtrend is still in tact, no overhead resistance has been broken, and all of the indicators are showing new lows with price. With no divergence in the charts, it would be prudent to consider this as a counter trend rally that is a temporary correction. Notice that the gap between up and down trends on the Aroon is getting wider.
The first area of resistance I can see that wen broken would begin to hint at a reversal is around 1058. This level meets the current downtrend line and the 50% fibonnaci retracement level from the mid august highs.
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