I think Thursday may have been the lows we may see this bear market.  Obviously, nothing is 100%, but I’m seeing things that have made me feel a little safe to start getting long at these levels.  And if we break these lows, I really don’t know where support is.  But I think the risk/reward is worth getting long at these levels.

My reasons:

1. One thing we always stress on the desk is to recognize patterns.  On the Level 2, on the chart.  Wherever you can spot something to gain an edge.  I’ve seen plenty of bear and bull traps since I’ve started trading.  If you take a look at the SPY chart over the last 6 months, you will see that the 84 area was established as a level, with 83.50 being the support from October.  On Thursday, when the SPY broke these levels, selling accelerated.  The SPY traded down to 82, then stopped, and reversed hard to the upside.  This is a bear trap.  You have to figure that people getting long after the October 10 lows were setting there stops right beneath those lows.  So when 83.50 was breached, the stops were set off that caused people to get out of their positions.  Aggressive traders were shorting below those lows expecting a vicious downmove.  Instead, there was a downmove to shake out the weak hands,  followed by a very strong upmove.  I’ve seen patterns like this occur so much intraday.  Clear levels are established.  They are then violated.  They then reverse strongly to the other direction.
2. I used to watch Fast Money religiously.  I stopped watching because with the exception of Macke, almost everyone on the show was bullish.  I could understand since they’re owned by GE, and I’m sure they are probably mandated to be more long than short oriented.  But I watched the show on Thursday after the close expecting them to say that the rally was a sign of great strength, and they were all without exception advising to sell the rally.  Another point: Nouriel Roubini, an NYU economist, who saw all this coming down the pipeline in 2006, has been on CNBC only a handful of times during the first 9 months of the year, has been on the network about 3 times since October.
3. Intel lowered its earnings guidance Wednesday night after the close.  Inital claims came in significantly higher than expected Thursday morning.  There hasn’t been one shred of good news coming out.  The market isn’t making new lows on all this news.  This is different than even a month ago, when just a rumor of something would cause a significant sell off.
4. China.  Watch the Chinese stock market for leadership.  In February 2007, the Chinese stock market sold off sharply in one day, causing a worldwide selloff, sending out the warning shot that not all was well in equity markets.  When worldwide markets topped out later in the year, China was the first market to top.  Over the last two weeks, China has showed strength, even when worldwide equity markets have shown weakness.  This is a divergence to take note of.  FXI has been much stronger than the SPY has been over the last 2 weeks.
5. Bill Cara posted 2 charts where he compares this bear market to the 2 most severe bear markets since the Great Depression.  Both the 1973-74 bear and the 1987 bear are very correlated to this bear, and suggest that an end could be close.
6. But even if the US economy goes into a long recession, there will still be opportunity for upside in the equity markets.  On October 13, in his Daily Report, Bill Cara pointed out the returns during the Great Depression that equity traders were able to take advantage of.
   • June 1, 1932 – Sept 7, 1932: 111.6%
   • Feb 27, 1933 – July 19, 1933: 120.6%
   • Oct 19, 1933 – Feb 4, 1934: 37.3%
   • Mar 14, 1935 – Mar 5, 1937: 131.8%
   • Mar 31, 1938 – Nov 14, 1928: 62.1%

We could end up breaking lows this week and starting another downleg.  I’ve been reading many articles lately by Elliot Wave technicians that are indicating we have one more downmove to go.  But for all the reasons I listed above, I feel more comfortable with being long at these levels than being short.