The Worst-Case Scenario for This Bear Market

U.S.markets sold off yesterday after three straight days of gains as the U.S.
dollar rallied and commodities fell under heavy volume. The Dow Jones Industrial
Average was hit especially hard in the last hour of trading, falling over 150
points as materials stocks fell in response to a sell-off in copper. The major
breakout by the dollar earlier this month occurred when it sliced through a
triple-top on a breakaway gap that at the time the Sept. 13 Daily Market Outlook
identified as a major change of direction for the buck, stocks, and commodities.
And even though the angle of the advance for the PowerShares DB US Dollar Index
Bullish Fund (NYSE: UUP ) is steep, it is also orderly in that continuation gaps
are being regularly closed before the ETF ramps up to its next high propelled by
another gap. This is a sign of a major commitment on the part of buyers and a
trend change that will not be easily reversed. Yesterday, we considered possible
resistance lines that might turn aside the pop that began last Friday as a
reflex rally following the breakdown of the bearish flag. But the pop fizzled
yesterday, on an impressive selling spree that ended close to the low of the
day. And so even before reaching its first line of resistance at the 50-day
moving average line, it appears that the rally is over. This sets up the index
for an attack on the double-bottom low at 1,114 and 1,101. (If you're looking
for some specific options to play the decline, check out my colleague Joe Burns
.) The dramatic failure of the index following a half-hearted rally leads to the
next question: How low is low? The final target of this bear run could turn out
to be a 50% retracement of the entire bull market from 667 to 1,371. If that's
true, then we owe Mr. Fibonacci another nod since that number is 1,371 a number
which is very close to last summer's low. For one stock that is advancing
despite the market decline, see the Trade of the Day . Todays Trading Landscape
To see a list of the companies reporting earnings today, click here . For a list
of this weeks economic reports due out, click here .