Signs of the Bottom Series -- Short Term Support

The Dow made a critical rebound today, putting in a short term support at around the 8500 level. This rebound is extremely important technically because it confirms the validity of the historical rebound of Monday. As you can see from my posts this week, I have been looking for a strong rebound such as this one to call a support. But is this the bottom? Not yet. A bottom can only be called after 2 or more supports are established. If the 8000 point level is indeed the bottom (supported by the monthly 200MA), then we should see the Dow go sideways for a significant length of time like we saw back in August and then wait for a breakout to confirm.

For now, the Dow continues to be in a short term and primary bear trend, so believers of trend following should still assume it to be so.

Inflation data came in flat today, which did not please investors. Why is that so? Simply because we are definitely going to see GDP come down when the inflation data start coming in negative (which is the statistical recession economists have been waiting for). Inflation can only come down with a reduction in aggregate supply due to the lower aggregate supply right now (which caused the grocession coming into 2008). This will cause the Okun gap to open up and result in recession. In fact, I suspect the final capitulation will take the form of an exodus by investors waiting for the elusive negative GDP number.

Tomorrow's options expiration day (see economic calendar), which can only mean more volatility given the uncertain weekend ahead.


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