What a day.  I’d like to ramble and rant for 6 pages about the politics played during the formation and vote of the rescue plan but I won’t waste my time or yours.  The whole process..  the he said  she said, the blame game and the ultimate failed result is a complete embarrassment ..  as the entire world watches.  I really thought that the plan would be approved today, even if by a slim margin.  It was a complete shock …  When the market doesn’t get what’s already priced in to some degree, particularly when dealing with something of such magnitude, you get the result of today. 

In my last report to members last Thursday and in my Sunday report here at the blog I expressed my uneasiness about the market due to the rescue plan fiasco and urged you to move more to cash (if you weren’t already there) until the events played out.  The capitulation day of the previous week and lighter volume pull back created a place to initiate a few positions in a "normal" market, but this market is anything but normal and as we saw today, news  trumps technicals.  The indices blew through the lows of the previous capitulation with heavy volume and finished the day with  the largest single day point loss in history. 

No, I don’t think we are done going lower.  Anytime you get a drop of this magnitude with a close at the lows it takes significant time to repair that damage.  Potential support levels I’m watching are Dow 10,000 (psychological support), then Dow 9700, Nasdaq 1900 and roughly S&P 1000 (more on this in the charts below).  The VIX soared today, hitting levels just above 48 but I think now we need to hit those highs seen around the 01 and 02 bottoms in the 55 – 60 range which could very well mean another drop in line with what we saw today.  With the Jewish holiday tomorrow, the earliest a new plan could be voted on is late Thursday, so I can’t imagine this market is going anywhere anytime soon unless the FDIC insurance limit is raised and/or the SEC suspends the mark to market accounting rule.  The rollercoaster ride continues…

If you are still in the market it’s important not to panic though.  There will be a better time to ease up on positions.  Fear is at historic levels and Jim Cramer does have a Dow price target of 8300 (not to mentioned uttered the words Great Depression once again) now so there are some signs that we are at least close to another tradeable bottom.. but would like to see one more big move down. 

I’ve had a few emails from people wondering whether it would be good time to put money to work.  The short answer is NO!  It’s too early yet.  The indices indicate stabilization when they capitulation and retrace in an orderly manner.  The previous capitulation of a few days ago was broken with today’s move, so now we need to wait for another capitulation move and orderly retrace to begin dabbling on the long side. 

Hang in there.  During this time, while you’re waiting for the market to sort itself out and stabilize, consider reading that investing book you’ve been wanting to read, review a few of your trades that didn’t go well and come up with a plan to improve your performance for next year.  If you’re new to the stock market I always recommend starting with William O’neils "How to Make Money in Stocks".  It really hammers home why reading the charts is so important and why a buy and hold approach is a failed strategy.

Let’s take a look at the charts:

The Nasdaq took out two levels of key support today, one being the low of the capitulation that we saw on September 18th at 2070, then again late in the day below the 2006 lows at 2012.  I believe that a test of the next level of support at the 2005 lows around 1890 (which is also close to the bottom of the downward channel) is probable before the next major capitulation point can occur.  If we can’t hold there, then the next likely test for the Nasdaq becomes 1750.  

The Dow closed right at the bottom of the downward trend today and also took out the lows of the previous capitulation.  A test of Dow 10,000 appears to be a certainty in the coming days.  If it can’t hold there, look for a test of the 2004 lows around 9700.

The S&P took out the 2005 lows and the lows of the previous capitulation, not to mention the bottom of the downward channel.  Banning short selling didn’t seem to slow down the financial heavy S&P today did it?  There is some support just below 1100, but I really believe that the S&P will need to test 1000 before all this is said and done.