Rogue Wave

Tonight the Dow futures are down over 200 points on the news out of Dubai, and while some have been calling for the beginning of the next leg down in the bear market, history does not support such a view. The October 2008 crash followed after months of distribution with markets making lower lows and lower highs. That is not the case now. Sharp declines that come off of rally highs are the market's way of washing out the weak hands so that the rally can continue. The most recent example of this type of behavior is March of 2007, which was followed by higher highs in July and October 2007. It may feel scary, but it most likely is not the start of a new downtrend.

When markets push higher into an intermediate or long term cycle low, a sharp decline often follows which pulls the markets down hard into the low. I believe the expected selloff tomorrow will be doing just that. At the moment I am not entirely certain whether the 10 month cycle low will occur in December or January. Even if the current decline resolves as a 5 wave decline, it probably won't help us much since it could be wave C of a flat correction. The only way we will know for sure is to watch the following rally to see if it is a 3 wave or 5 wave rally.

Either way I will assume that when the dust settles next week or the week after, it will be a buying opportunity for a christmas/year-end rally. The first level of support is the November lows, followed by the 200demas. If the correction needs another leg down to complete it in January, we can always reverse and go short again.

A word of caution - a sharply lower open tomorrow would probably not be a great time to go short except possibly for daytraders. If you are not already short, it would probably be best to sit this one out and wait for the next opportunity.