Evening Update - December 9, 2008

No rants today, just the facts. Today's S&P futures made a lower low and a lower high, which is bearish for tomorrow.

For the bulls, key resistance to break is 918; this is the descending triangle downward trendline. I'll be "shocked" if this doesn't hold, which is to say I'll be buying some puts at this level.

For the bears, it's a far less challenging day. With momentum on their side for the first time, they will test the prior day low (884.5), and after snapping that support, they will attempt to take out the 20 day EMA (875). 850 is definitely in play for tomorrow if we break the 20EMA, followed by 828.

Here are the stats for each of the last few times we broke below the 20EMA:

Date........Peak to Trough Loss..Peak to Trough Days..Avg Loss/Day
12/??/08................??.......................??....................??
...10 days ago...
12/1/08..............-8.8%......................1.................-8.8%
...26 days earlier...
11/5/08.............-25.7%...................16.................-1.6%
...46 days earlier...
9/19/08.............-28.7%...................21.................-1.4%

See how the time between the moves is accelerating? It took 46 days from 9/19 to test (unsuccessfully) the 20EMA, and then it took only 26 days to test it again. Here we are again roughly 10 days later testing it again. That's good news, we are assaulting the 20EMA more frequently. However, each time we fail, we have a significant downturn and put in new lows, and the velocity of that downturn is getting more severe in percentage terms. Holding the 20EMA this week is not trivial. [The December 10th downturn was a minor downturn, so I wouldn't really put it in the class of the other day since it only lasted one day, but it was a doozy.]

If a bottom is indeed forming, we should have some evidence of it by the end of the week. Hold the 20EMA and that creates, at a minimum, an inside week coming off of an up week. We'd also have a situation where the 20EMA is in an uptrend slope, and it is closing in on the 50EMA at a distance that hasn't been this small since October 7. I do not think it a coincidence that about that same time, the VIX was below 44 and it hasn't been that low since, testing and failing on November 3rd. The VIX has to break below 54.50 to confirm we are bottoming in my mind.

If, however, we break and can't hold the 20EMA, it is time to retest the lows. Certainly, the 835/840 range will get challenged, then the 805 range, then the 750 range.

I picked up two new shorts today:

GDP - SHORT - entry $31.00, intermediate target $15
EOG - SHORT - entry $73.00, intermediate target $40

Joe