Commentary for October 9, 2008

| October 9, 2008

The developing market crash continues to plunge stocks to fresh long-term lows, and the S&P 500 index is now extremely oversold across daily, weekly and monthly time frames.

As we have discussed previously, a true crash such as this one does not obey the normal laws of market motion. Prices fall much too far, much too fast as panic and fear grip many market participants. When irrational behavior drives price action in this manner, it becomes difficult to predict with any useful degree of accuracy when the freefall will end, however stocks are now so oversold that they are overdue for at least a short-term technical reaction which will very likely be just as violent as the decline. The S&P 500 index is now down about 25% in two weeks, and a drop of that magnitude over such a short period of time will nearly always result in an extreme move higher once a short-term bottom is found. This technical bounce should occur sometime over the next week or two, so watch stocks closely.

We realize that many of you have not lived through a genuine market crash, and it can be an extremely unsettling experience. It is during times like these that charts are their most useful, as they enable you to both remove the emotional component from your analysis process and take advantage of the inevitable opportunities that accompany an environment of such extreme volatility. At the very least, the end of the crash will be followed by a violent bear market rally that should produce substantial gains over a comparably short period of time, and the charts will lead the way.

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Category: Commentary, Market Update


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