As for the major averages, I am leaning towards a fairly significant bounce from around the 820 area - perhaps all the way back up to 920. However, being in a bear market, the potential is great that we just plough through 800 on our way to new lows.
The 820 level did provide some short term support, creating a 5% short covering rally into the long weekend. However, early Tuesday morning, the tires burst and markets gave up all of that 2 day gain and closed at it's lows of the day for a total loss of over 5%. This all occurred as inauguration festivities were supposedly injecting new optimism in Americans.
Tuesday was a perfect example of how markets do not react to the news, rather the markets determine the news. If markets had rallied, it would have been because of Obama's inauguration. Instead, markets fell because of poor earnings by State Street, a 8 cent drop in the British Pound or the potential nationalization of British Isle banks. I always find it hilarious when major media outlets scramble to find the reason for why markets moved on a slow news day. It's the same on days like yesterday when there are contradictory bits of news. How many papers would they sell if they simply told the truth and reported, "Traders and investors reacted to subliminal, endogenous signals that stock prices were too high, and felt they could benefit from purchasing shares at a lower price sometime in the future. Traders and investors with the opposite sentiment were overpowered by the former."
But I digress. The news is more interesting. Even if there is no way to measure how it effects our decision making.
A number of technicals experts I subscribe to or follow closely have been eyeing the 787-791 area as potential support for a multi-day rally. So I'll be watching that level closely. If it provides a bounce back through 800, I would consider covering some of the short exposure I took at the highs. If it does not provide support, or if a bounce is on low volume, or if financials do not participate (!), I will continue to eye new lows. I do not give the possibility of a double bottom a very high probability. Meaningful double bottoms typically take place over far longer timeframes than 8 weeks. My first target remains 600, which will be refined as time and price develop.
In my Currency Outlook for 2009, I wrote:
The British Pound may be in an even worse situation. Home prices are crashing all over the UK, putting even more pressure on the already ailing financial system. The pound lost 25% of it's value to the USD over the course of 2008. I can see that happening again in 2009. I would not be surprised to see the pound trade at par with the USD.
Over the weekend we learned that the big UK banks were going to require yet another government bailout to stay 'affloat.' The government increased it's stake in the Royal Bank of Scotland, and fears are that Barclay's and Lloyd's will be next. Of course, the pound got clobbered - again. Apparently, throwing a life preserver to a rotting corpse is not seen as proactive. I stick to my 2009 target of 'par' with the Greenback and will likely go under compared to the Euro. See the carnage:
Gold did not react negatively yesterday to the large uptick in the dollar. That is the type of divergence one would expect to see if the yellow metal were to continue higher. I remain intermediate-term bearish on gold, but understand that as it is still in a long-term bull market, surprises will come to the upside. A close above $900 would likely have me buying.
That's all for now. I'll try to make this a weekly post.