Market breaks down officially, Dow below 7000.

As I wrote a few days ago, the market found itself at a very critical level and had to hold in terms of supply and demand. Down 7,000 is both a psychological and technical level that if breached would usher in a new wave of selling and it did so with 4-5% across the board drops.

The MSM will certainly try to explain this as a response to AIG's 60+ billion loss, but of course that is not true and has little to do with today's action. In fact AIG's cash losses are a mere 2 billion, but the assets that they insure dropped 60B in value. Oops? If anything, our mindless torpid government pledging ANOTHER 30 Billion to this company would be a catalyst for a sell-off.

So right now, one would wonder what the correct course of action is for those who have been holding on desperately to their 401Ks and watching their accounts wither away. At about these levels, we are looking for capitulation, a mental white flag where the pain becomes too great and people sell in droves. We should experience a strong washout day, where the market opens down and sells off hard only to reverse and stage an impressive comeback on massive volume. Once this happens, a rally lasting anywhere from 20-30% could start. Why? Because history shows that no bear market goes past 40-50% without some kind of rally. As in everything with the stock market, patterns can provide a beacon in the all too foggy landscape of investing.

Those seriously considering closing down their 401k and moving to cash, could be rewarded with an exit point.

Rough targets for the capitulation area on the S&P500 could be somewhere in the 650 range and then rally back into the 800-900 range. Problem with washout days of course, is that they always get retested, since we have such a broken market with such a broken economy that this retest will be a scary situation. However this could be months from now and if we DO see a rally, then the most likely time for a retest will be in September or late August - two of the worst months of the year for the stock market. As of now, focusing on the short term is the most important and easiest in terms of prognostics.

Disclosure:
As of now I am still long on my 401k because someone my age really does not care, but even I will exit if I see S&P 800-900 again.
Short term, despite all the bounces and head fakes a washout day is a must and I hold my short positions.

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