Tuesday, February 10, 2009

The Writing Is On The Wall

The Dow closed decisively below 8000 today for the 6th time since October last year. It is clearly leading the way down. The Qs stopped at a 6 day trendline, so a bounce tomorrow is possible, but any bounce is not likely to last long. Today's action appears to be more than just a correction of the rally, but as bad as it was it may be premature to rule out one more attempt at a rally high. A break of 29.69 in the Qs, the January 2nd opening day of the year low, would confirm the downtrend. Any number of other methods could also be used to confirm the downtrend in the Qs: 1) a 3 week low at 27.96 (or 28.74 if not broken this week), 2) a macd sell signal, 3) a break of the lower trendline of the rally from the November 21 low, or 4) 2 days of higher lows which would create a fractal sell pivot followed by a break of the pivot.

I don't think the choice of method is all that important. What is important is recognizing that the intermediate term trend is aligning with the primary trend, and that is where the money will be made until we get a climax bottom.

Looking at the Dow, I see the two primary targets at 6400 and 5000, based on fibonacci extensions and long term moving averages. I really don't think 5000 is likely, so 6400 is the most probable bottoming area. 6400 is at the confluence of the 400 month ema, a long term trend line beginning at the 1987 low and is a fibonacci extension of the recent decline from the January high. If we happen to hit that area around March 10+-, then I will be exiting all short positions at that time regardless of whether or not other targets have been hit as the upside risk will be tremendous. The rally off of the upcoming low will most likely be similar to the rally after the 9/21/01 low and the 3/12/03 low, the kind of rallies that can wipe out a month's worth of gains on short positions in a couple of days. The point is: don't be greedy.

The most likely bottoming time frame should be March 10 to March 21 based on the 10 month cycle and Gann turn dates. Due to the large number of turn dates in March, it could be a violent bottoming process with several big swings before it gets off the ground. Either way, again it is best to be out of shorts during that time frame.

The only thing that would alter this outlook would be a collapse below 6400 well before March 10. If that were to occur, then the 5000 target would be the next most likely outcome.

Since today's action most likely signals the beginning of the final leg down, I exited my RIMM long position today for a modest gain of 16.6%. I see no point in waiting around to get stopped out at the three week low of 48.99 giving up all of the gains when it will most likely follow the Qs down. I am still long POT as it appears to have one more up leg left. Other than a couple of biotech longs that I intend to hold through the final leg down, I am mostly short. I have at least 3 more short stock positions to add and I will add to index short positions using one of the confirmation methods I listed above.

Good luck and be patient. This downtrend should last 3 or 4 more weeks.

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