That Was a US Stock Market Capitulation Bottom. Next: Follow-through Rally then Re-Test of Lows.

What a crazy two days in the U.S. Stock Market!

On Sunday, January 20, 2008, the stock market was very oversold by many metrics, and we were due for a bounce. This blog mentioned on that day:

"All signs seem to indicate an S&P 500 Bounce may be coming soon (possibly after some sort of gap down, high volume down day, then a massive rally, for a capitulation bottom)." - TechFarm Blog

Monday, January 21, 2008 was a US Holiday. During this time, the worldwide stock market was selling off very heavily. Before the market started on Tuesday, January 22, the Dow Futures were down over 500. News reports from CNBC and other areas suggested that the Sky Was Falling.

For those anticipating a capitulation bottom, this was a good sign. There was a feeling that people would start to panic and sell at the lows. This is needed to help establish a capitulation, crescendo selloff bottom.

On Tuesday, January 22, the market gapped down (opened lower than the previous close), and the S&P 500 went down over 51 points (1325 down to 1274) for a decline of almost 4%. Then towards the end of the day, the S&P 500 recovered 36 points for a nice rally.

On Wednesday, January 23, Apple (AAPL) reported bad numbers, and the S&P 500 sold down very heavily, going down all the way to 1270 (re-testing the bottom on Tuesday). Then towards the end of the day, the stock market had a massive rally, going up 68 points for an over 5% swing on the S&P 500.

This looks like a classic capitulation bottom.

But does this mean we have an all clear?

This capitulation bottom might mean that we will have some sort of near term rally. We need some good follow-through.

In the previous post, we speculated that the S&P 500 might re-trace around 38.2% to 50% of the drop from the top. With the updated short to medium term bottom of 1270 on the S&P 500, we could re-trace and rally up to 1387 to 1423 or so before we go down and eventually re-test the lows.



Since V-bottoms are not the norm, we can expect a re-test of the lows at least once. During each re-test, the S&P 500 could pass (bounce off that support), or the S&P 500 could fail (continued breakdown to new lower support levels).

Do you feel Bearish?

If you feel bearish about the market, you can sell the upcoming rally, raise cash, rotate to defensive stocks. Once the market successfully re-tests, an investor could start thinking about going long on stocks again (profit from a stock when the stock price goes up.)

Today's Stock Chart