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One by one, the key indices appear to be breaking their support lines.The Dow Industrials were the first to break earlier this week and yesterday set a new bear market closing low. Now the S&P 500 has fallen through its support zone at 800-820 and so has the NYSE Composite. Only the Nasdaq is holding above its January low, while the others are in a full test of the November bear market bottoms.
For several days, I've been comparing this week's market action with the week of Nov. 17, when the market broke to new lows and then reversed. We've discussed the closing low of Nov. 20 and the subsequent reversal on Nov. 21, with its new intraday low, the similarity in the volume, the similar stochastic readings and so on.
There is another similarity as well: The closing low of Nov. 17 was the day before the expiration of the November options -- and the new closing low this week was also made on Thursday with February options expiring on Friday.
Will the market rally today and reverse -- creating a perfect mirror image of the November bottom -- or will it be buried in new lows?
If it rallies, the market could run into the enormous four-month supply area and then turn and test the lows again -- or it could form a permanent double-bottom. But if stocks fail to reverse today and volume increases while setting a new closing low, we could be on our way to 650 on the S&P 500.
In this environment, many investors are turning to gold, and one stock that looks strong is Barrick Gold Corp. (NYSE: ABX), my trade of the day.
Sam Collins is a contributor to OptionsZone.com.
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