Wednesday, October 22, 2008

Breakdown Coming

The markets are in either Minor wave 5 of Intermediate wave (3) down or still in Minor wave 4. In either case, new lows are soon to follow. If the current pattern is Minor wave 4 with a triangle, the thrust down out of the pattern should be fairly short as the time duration after a triangle is typically about 1/3 the time of the triangle formation. This puts the thrust at 3 to 4 days, meaning we could see some type of bottom as early as next week. On the other hand, if we are already in Minor wave 5 down, we could see much lower lows and a longer duration to the low. My original cycle low date was November 26 and my revised date is December 6. I am expecting the low to be somewhere in that time band. This would imply significantly lower lows in November. We could easily see the Dow and S&P test the 2002 lows. Currently, the Qs look like they might bottom in the 23 to 25 range. We should see the Qs test the 2002 lows by March 09.

The most important point to understand here is that while there is some short term reward to the downside, it is probably too late to add to short positions. I added two new positions today and I am going to hold with that. I am looking to take profits at targets as the markets move down, hopefully being completely out of all shorts by the time the low is seen.

After this low, we can expect a 4 to 8 week rally. It will be weak at best and volatile. Most of the profits will be seen in the early thrust off the bottom, so there won't be much point in coming in late. Look to add small long positions in beaten down large caps by mid-November and scale out when the rally comes.

Don't fight the trend.

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