Market Finds Support - For Now

Twenty years to the day after the Crash of 1987, stocks sold off Friday to the tune of 366 points on the Dow. This ominous-sounding number actually pales against the 508-point loss of October 19, 1987 if you look at each day in percentage terms. Friday's loss nevertheless added to October's reputation as a dangerous month for traders.

The good news is that the equity benchmarks stopped right about where we would expect them to. The area around 1500 points on the S&P 500, give or take a few points, provided solid resistance in August and early September. This level gave way on the rally of September 18 and the S&P 500 cruised upward and stopped just above its July high point. As is now apparent, the 1560-1575 zone is as high as the market seems prepared to go for now. Likewise, the 1500 area held as a bottom today. Further losses from here would begin to unravel the bullish case for stocks and point to an intermediate-term downtrend. The next few days will be critical.

Some of Friday's worst-hit sectors bounced today, notably financials, consumer discretionary and utilities. One sector that hasn't yet recovered is energy. Commodities of all kinds are weakening as signs of an economic slowdown continue to mount, and crude oil pulled back after briefly moving above $90. 3Q corporate earnings have not been a total disaster, but there haven't been many upside surprises, either. Consensus estimates now show an average profit decline of 0.6% for the quarter, which would be the first drop since 2002.

Short-term indicators suggest the market is oversold, and today's slight recovery is encouraging in that regard. If the selling has indeed run its course then next week's Fed meeting could easily spark a major rally.