Speculation On A Bottom

Recent events have put the markets in a precarious position. It's clear that if last week's lows are taken out on volume that a crash could unfold, but will that be the case? The short term bottom on September 17 occured at precisely 3x55=165 days + 1 day from the January 24 bottom earlier this year. This marks the bottom of the 3rd 11 week cycle in the 4x11=44 week cycle. After the January low, markets rallied for 7 days before falling to new lows. We now have a situation that could repeat that pattern, except this time the pent-up expectations of a government bailout of historical magnitude could enable the market to rally until the end of October which would coincide with the high of the 11 week cycle.

I have recalculated the 44 week cycle low date and the corrected date for a low is December 5th. However, there are some other longer term cycles due to bottom in mid-November so a bottom could come early. This would lead to an expected year end rally followed by another January swoon and another March low in 09.

I will be looking to get short again at the declining 50dema in the Qs which now also corresponds to the bottom of the upsloping channel from the 2002 low. I will only exit on a solid close above the August high. If the markets crash through the September lows before then, then I will be looking to jump on board because it should be straight down. However, in that case a smaller position size would be warranted due to the possibility of a massive whipsaw.

These are difficult times to trade and being heroic will not win you any awards. Better to sit it out and wait for clear signals than to take huge risks if you are uncertain about your plan of action.

I wish you all great success in the coming weeks.

What Now?

While it is entirely possible that the markets could head down from here, more than likely we will see the upward correction in the downtrend continue for at least two more days. Personally, I will be looking to get short the Qs at the declining 50dema if that level is seen. The Qs may top before the Dow and SP-500. I expect the Dow and SP-500 to make an attempt at their declining 200demas.

Once this rally is over, the subsequent decline will tell the story. Does it pullback on declining volume? Then, maybe higher highs will be seen. Does it head straight for the September lows? Then, probably much lower lows will be seen. In any case, the trend is down and that is the most likely direction.

Catastrophe Averted - For Now

The massive reversal in the financials - XLF and BKX as well as the Russell 200o IWM indicates that the decline is over for now. There is no point in riding this out short, particularly if the government is banning short selling. Short sellers have become the biggest scapegoat for the market's demise, but while there certainly have been abuses, it is highly doubtful that short sellers have caused the housing market to collapse, banks to make risky loans and the FED to pump up the money supply to the point that inflation became rampant. As long as short selling is being done in accordance with regulations, it is a direct hit on the free market and market efficiency to disallow it. In the end, regulators will find that the market can go down and violently with or without short sellers.

Our trend following indicators are still down, but the futures are indicating more gains for tomorrow so several short exit signals may be seen tomorrow. This is one of those times that it may not be worth the wait.

Parallel In Jeopardy

In my last two posts I discussed the similarities in the price pattern in the Dow to 2001. Yesterday's high volume reversal puts that similarity in jeopardy. The financials certainly appear to have put in a short term bottom and possibly the Dow as well.

If the downtrend is to continue, we would expect price not to close above its falling 20ema. A trendline drawn from the September 2 high in the Dow downward through the highs of this decline puts overhead resistance in the Dow at around 11230 to 11250 tomorrow.

If sideways action is followed by a continuation of the rebound, then look for another test of the August highs prior to a resumption of the downtrend. If sideways action is followed by a breakdown, expect the downtrend to accelerate. If the market moves sharply higher, wait for a retest or pullback to see if its for real.

At this point the trend is still down and there is no point in trying to second guess that.

Redux Follow-up

Around 7pm this evening the Dow futures were down almost 300 points. Of course, they could recover by the morning, but it looks like the expected selloff will be underway tomorrow. Confirmation will come when the July 15 lows are taken out.

Traders should keep in mind under these circumstances that the usual indicators of oversold conditions will not work in this type of selloff. Rather, look for climactic volume with large range days to signal short term bottoms. Also, be aware that due to the current cycle we are in, the ultimate bottom of this decline may not be until March 09 with a year end rally to separate a potential double bottom.

2001 Redux

The current pattern in the Dow is eerily similar to the pattern of 2001. I am not in anyway suggesting that there will be any kind of terrorism, just that the price pattern is similar with about a 1 to 2 week lag. If that is the case, then we can expect an acceleration of the downtrend once the July 15 lows are taken out which should occur within the next 10 trading days. If the Dow moves above the August highs prior to that event, then the similarity would be negated.

Including the breakdown day of 8/30/01 that selloff took exactly 13 trading days to reach a climax. The difference this time is that if it occurs, I think any bounce from the first climax will fail leading to a retest or lower low that occurs sometime in November. On that basis we might see the first climax low from October 1 to October 15. October 13 is a holiday so October 14 to 15 looks like a strong possibility.

This is all speculation, of course, so let's wait and see what happens first.

From Pullback To Breakdown

Today's breakdown and close below the July high of 46.15 in the Qs on volume greater than the 8/6/08 breakout is a sell signal on the Weekly - Daily price system. We never had a valid buy signal on the breakout due to the weak volume and now the Monthly downtrend has been reconfirmed. There is still a chance that a reversal from today's level back above 46.15 could "save" the markets, but it doesn't look like that will be the case. The Cabot's Tides also gave a sell (short) signal today.

In prior posts I indicated that we should expect a reversal no later than September 9. Today's breakdown probably indicates that the rally will not make it to that date. The fact that the 22 week cycle low came late (July 15 vs June 24) and the current 22 week cycle high is coming early portends significant weakness this fall.

Expect a test of 46 from below in the near term followed by an accelerating downtrend. If the current trend does accelerate, it would probably be unprofitable to try and trade the bounces as downside gaps may be common. This is a trend to hold onto once your in the trade.

If you get stopped out, don't be afraid to give a couple of more chances. It could be very rewarding on the short side.