Stock Market Crash - 2 Keys to the Market's Next Move

Wall Street suffered a brutal session today, with the Dow Jones Industrial Average (DJI) dropping as much as 1,000 points intraday and temporarily dipping below the 10,000 mark. That’s a midday swing of more than 9% — sending the benchmark index to its worst reading since February. The market ended up fighting back to 10,520 at the close, but still logged its worst intraday decline in history.

But the most important story, believe it or not, is not the stock market per se. The real chaos investors need to watch closely is the currency markets.

Driving the market’s declines were fears that Greece’s $140 billion rescue package from the International Monetary Fund and euro zone nations is just the tip of the iceberg. Some of the nations footing the bill — Portugal and Spain chiefly among them — are in pretty dire straits themselves and may need a bailout of their own. On top of that, some fear that the bailout may not be enough to right Greece’s economy and prop up the euro zone.

Governments and investors alike aren’t asking whether Greece’s economy is too big to fail, but whether it’s too big to save. When the U.S. government bailed out GM, it then had to bail out Fannie Mae and Freddie Mac and Citigroup (C) and Bank of America (BAC) … the list goes on, and the price tag was enormous. But if nations had to band together to bail out these companies, who will band together to bail out the nations?

With no answer to that question, investors are fleeing to gold and roiling the currency markets. The Japanese yen, the Swiss franc, the Australian dollar all moved 4% to 6% during today’s volatile session. That’s no accident — massive triggering of institutional stop losses can’t drive currency markets that crazy, nor can a flood of short selling.

The encouraging sign is that after the market’s gut-wrenching dip at around 2:45 p.m., it began a steady march back up. The Dow eventually closed down “only” 3.2%. The S&P 500 (SPX) closed off 3.2% and the Nasdaq (NASD) shed 3.4% when all was said and done.

So where do we go from here? Unfortunately with a Friday ahead of us it’s too soon to tell since investors really don’t like to go long over a weekend when uncertainty like this is gripping the market. We’ll know more based on the market’s movements tomorrow and early next week

Here’s what you need to watch:

Gold: If the market is up 100 points or so but gold is also up, it’s time to run for the hills. A clear sign of a dead cat bounce in equities is if investors are still seeking shelter in gold and driving it up $20, $40 or $60 in a single session. A run in gold tomorrow and into early next week means Wall Street is stockpiling the yellow stuff before running to the bomb shelter. Stability in gold means that the panic selling has abated.

Currencies: If the euro drops another 3% or so tomorrow, it means that Greece’s debt fears and the subsequent fallout are still weighing heavily on investors everywhere. It’s just plain impossible for the market to move higher if the euro doesn’t bottom out. If we’re seeing improvement in the currency, then things may be stabilizing … but if not, look out below.

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