[RT] how to spot mkt bottom, RealTraders Email List Archive

The Five Signposts for a Market Bottom

S&P 500 Index (SPX) holds above the 1000 level ? The 1000 area on the S&P has double-barreled technical significance. First, it is the site of the S&P?s 195-month moving average, a long-term indicator that few investors follow. This moving average very often represents the last ?line of defense? from which a bottom can take hold after a major decline. And second, 1000 is one of those ?super round numbers? that hold extra technical significance as potential support and resistance levels.
The CBOE Volatility Index (VIX) closes below 40 and preferably below 35 ? The record closing levels of the VIX in recent days are encouraging as a broad indication of the high levels of investor fear that often accompany market bottoms. But this is a difficult timing tool as no one knows just where the VIX will ultimately peak, and higher VIX peaks are almost always accompanied by lower stock prices. The 35-40 area marked the VIX peaks on three separate occasions in 2007-2008. A decline by the VIX into this zone (or preferably below) would likely represent a strong ?all clear? signal for the market, as it would indicate a break in the ?fever? of the banking and credit crises.
The Fed cuts the fed funds rate to 1.25% and preferably to 1.00% - While the Fed?s 50-basis point rate cut to 1.50% this week was necessary (and long overdue), further Fed action is necessary to help reliquify the banking system and lower mortgage reset rates.
December gold futures close below $800/ounce ? The financial crises and the plunge in share prices has spawned a bubble in gold prices, and the bursting of this bubble ? as evidenced by a close below $800 ? would have very positive implications for the stock market.
Stocks begin to react positively in October to third quarter earnings reports ? Expectations for the earnings reporting season ? which began this week ? are quite low. To the extent stocks react positively after they report their earnings ? especially in the crucial days immediately following these reports ? this could have extremely bullish implications for the market. Such positive reactions would indicate that current share prices have already discounted the current weakness in the economy, and savvy investors are expecting these results to stabilize or improve in the months ahead.