Technical Market Insight January 22, 2008, 9:24AM EST

Markets in Turmoil

There is absolutely no way to tell where things will bottom out in these panics until after the fact

by Mark Arbeter From Standard & Poor's Equity Research

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The market is set to open sharply lower Jan. 22 following Monday’s large losses overseas. The FTSE plunged 5.5%, the DAX tumbled 7.2%, the CAC 40 slid 6.8%, the Hang Seng dropped 5.5%, and the Toronto 300 declined 4.8%. S&P futures are down 3.4%, or 45 points, to 1280, suggesting that the cash index will open somewhere below that level. The futures have rallied in the U.S. as the Federal Reserve acted aggressively and cut the federal funds rate 75 basis points this morning to 3.5% in an effort to put a floor underneath the market and calm investors nerves, if that is possible.

As we have said recently, our intermediate-term target for this decline is 1250, which may get hit or taken out today. There is absolutely no way to tell where things will bottom out in these panics until after the fact. You just have to let them play out. Sentiment readings should move to extremes today, setting up the potential for a tradable bottom.

The largest one day losses for the S&P 500: 20.5% on Oct. 19, 1987, 8.3% on Oct. 26, 1987, 6.9% on Oct. 27 1997, 6.8% on Aug. 31, 1998, 6.8% on Jan. 8, 1988, 6.7% on Sept. 3, 1946, 6.7% on May 28, 1962, 6.6% on Sept. 26, 1955, 5.8% on April 14, 2000, 5.4% on June 26, 1950.

For the most part, these drops were very close to major market lows in both time and price. The drop in 2000 was the only one that was not close to a major bottom in either price or time.

If the 1250 area gives way, the next zone of chart support is in the 1140 to 1170 range. The next key Fibonacci support or a 50% retracement of the bull market is at 1171.

Bond yields are down, but way off their lows. The 10-year Treasury got down near 3.5%, but is currently up near 3.6%. We expect bond yields to continue to be volatile, and move down with stock prices.

Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's .

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