What next?

The anticipated relief rally lasted all of a couple of hours before the markets sold off to new lows wiping out the positive divergence that was present in the 5 period RSI. However, a relief rally still may be in the making as yesterday's lows were tested on lighter volume and the markets may have completed Minute wave iii of Minor wave 3 of Intermediate wave 3 of Primary wave 1 down today. If so, we can expect Minute wave iv to retrace approximately 38.2% of the decline from September 19, which gives a target of 36.69 in the Qs. An now expected Fed rate cut may be the spark to ignite such a rally. With the volatility at current levels the rally targets could be hit in just a few hours, afterwhich the markets would move down again to complete Minor wave 3 down.

Today the Qs bottomed just 8 cents below the 04 low, which may provide temporary support. The Dow closed below the 04 low, which pretty much means the 9043 level will be hit next. The one fly in the ointment here for a relief rally is that the S&P financial index closed under the July low for the first time today, while at the same time the shorting ban on financial stocks comes off tomorrow night at midnight. This is not a good sign. In all seriousness, if the financials continue to selloff hard, we may see the Dow fall to the 2002 lows by mid-November 08 instead of March 09.

This has been a mixed week for me emotionally. I have felt a certain sense of calm given that I am positioned with the market trend and my accounts are rising, but it is sad for me to hear friends and family tell me that their retirement accounts are down over 50% in many cases. I am sad for them because I spent the last two years earnestly encouraging and in some cases pleading with people to sell their stocks and mutual funds before it was too late, but I can tell you that not one of them listened. Many laughed at me when I said that the Dow would eventually fall below (well below) the 2002 lows. And here we are, just 2250 points above that level, not very far at all . Unfortunately, it appears that many people will be wiped out in their retirement accounts before we even get to the worst of this bear market. Yes, this is only the prelude, the warmup, to the real deal that will probably occur from the middle of next year into 2010 to 2014.

Amazingly, with extreme volatility and extremely negative breadth readings, overall, traders and investors are not extremely bearish on a sentimemt level. The Option Buyer's Sentiment gauge is almost in neutral territory. Folks, we are not going to see any kind of bottom until the sentiment matches the breadth. So please don't be buying right now. There will be plenty of time to buy when the market confirms a new uptrend.

If you are in cash, stay there and wait for the next opportunity. If you are short, scale out as your targets are hit. Profits in short positions are often erased very quickly when unexpected rallies occur.

Until the next post, stay calm and support the people around you that are suffering in these difficult times.