Cautious open seen; oversold market tempts bargain hunters

Kevin Pendley | Oct 07, 2008 9:20am EDT | Comment

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Small-cap stocks are expected to open flat to slightly higher in a continuation of the bounce off the lows Monday afternoon. The market is oversold and the daily chart pattern is supportive, but overnight inter-bank lending rates were still tight, financial banking news overnight was disappointing and the tone was still cautious rather than exuberant.

Stock markets around the world were a little more calm overnight, which also likely helped stabilize the situation for U.S. equities. Although Japan was off 3% overnight, Taiwan was up 0.3% and Australia was up 1.7%.

In Australia, the central bank slashed rates by 100 basis points, which came as a big surprise and spurred calls for similar cuts by other central bankers around the world. Bill Gross, chief of the world’s largest bond fund at PIMCO, called on the Federal Reserve to match the Aussie’s rate move in a globally coordinated move. Traders here seem so focused on getting a “surprise” rate cut from the Federal Reserve that the market actually moved lower this morning ahead of the opening when the Fed announced the schedule for the new auctions. In some ways, the anticipation of a big, pre-meeting rate cut seem silly because the Fed funds rate has already been trading well below the 2% target rate for most of the last two weeks.

Crude oil futures were up about $3 a barrel heading into the opening, and the copper market was trying to grind higher. These signs of stabilization in the commodities world will likely support the Russell 2000 (NYSE:IWM), which has been tracking trends in physical markets more closely than usual.

Momentum readings such as stochastics and the relative strength index have been at extreme levels, but until Monday’s late recovery showed no signs of bottoming. With the recovery move in hand, there is a better chance for the market to stabilize or correct higher, but it would take further patterns on weekly charts to suggest that a key bottom has been carved out. From a short-term perspective, being oversold and forming a big “hammer” bottom formation on daily candlestick charts is clearly a positive for today’s action. Price action back below 590 today would jeopardize the hammer candle. From a longer-term perspective, there is logical support in the 577 to 570 zone, and it would make sense for buyers to try again in that area if the market starts to wobble the next couple of days. Looking at short-term upside resistance for today, the “figure” point at 600 is an obvious point to watch, as is 606, then 620.

On the company news front, Bank of America Corp. (NYSE:BAC) said it would slash dividends and raise $10 billion in capital, which sparked a downgrade on the bank from one of the most influential analysts — Meredith Whitney at Oppenheimer.