THE NEXT MAJOR SUPPORT LEVELS GO BACK TO THE 2002-2003 LOWS -- WATCH BOLLINGER BAND WIDTH FOR SIGNS OF A REBOUND -- MARKET STILL DROPPING

NEXT MAJOR SUPPORT ... One of our readers suggested that we get back to basics and simply point out where the next major support levels are located. To do that we have to rely on monthly price charts. In a major bear market, the best way to look for potential support levels is to look for previous lows that were hit during the last bull market. The monthly bars in Charts 1 and 2 show, however, that all of those prior reaction lows have been broken. Another potential support level occurs in the 62-66% retracement level of the previous advance. Both the Dow and the S&P 500, however, have lost more than 70% of their previous bull market gains. That makes the next major support level the lows that were formed in late 2002-early 2003. That doesn't mean that we have to get there in a straight line. There's always the possibility of a fourth quarter rebound. But it now looks like the 2002-2003 lows will be revisited sooner or later.

Chart 1

Chart 2

GOOD AND BAD NEWS ... There's good and bad news on Chart 3. The good news is that the 14-month RSI line (top of chart) has reached oversold territory (below 30) for the first time since 2002. The bad news is that the monthly MACD histogram is showing no signs of a bottom. Even if a fourth quarter rebound does occur (which has often started during October), it would probably represent an opportunity to do some selling.

Chart 3

WATCH BAND WIDTH ... One way to tell if a rally is starting is to watch the width of daily Bollinger bands. Chart 4 shows that the two bands have been widening since the start of September. That's usually a bearish sign because it means higher volatility. The black line below Chart 4 measures Bollinger band width which has surged since the start of September. In fact, it has surged to the highest level in more than twenty years (as has the CBOE Volatility Index). That's obviously a sign of tremendous fear in the market. One way to tell if the market is starting a bear market rally is when the black line starts to drop. If and when it does, the S&P could rebound back to the dashed 20-day moving average. I don't like selling during market panics. Only time will tell if that's a good strategy. I have no problem, however, with selling into bear market rallies.

Chart 4

ALSO WATCH HOURLY BARS... Stock prices are falling to new lows again today. Charts 5 and 6 show hourly bars for the Dow and S&P 500 since the start of October. The pattern of lower lows and lower highs is clearly evident. The short-term trend will remain down as long as that bearish pattern is maintained. To change that, prices would have to exceed the first resistance barriers at 9627 in the Dow and 1020 in the S&P 500.

Chart 5

Chart 6