Wednesday, September 16, 2009

Market Scenario

From my perspective, today's rally limits the scenarios fairly significantly. I do not believe that we are looking at any of the patterns playing out that most people have been watching. I think this sets up a deer in the headlights situation. Shorts, who have endured the pain and no longer understand the pattern are going to get confused or capitulate and perhaps even go long. Longs only know that everyday they keep missing the rally in a big way - if they sold much lower and missed out, up to here, they will capitulate. This panic move seems to be in love with the inflation trade.

I had hoped that we would get the inflation trade - which would entail a rise in Gold, Silver, Oil and stocks and a fall in the dollar. Well, this is a signifcantly larger trade than I imagined. I fail to see any room for nice consolidations and neat patterns here. It looks as if its more likely going to get disorderly and fast.

Today's break over the rising wedge is not something I would have liked to see at this point. And that pattern does not suggest an orderly pull back to consolidate the gains. Nor does it suggest an orderly sell off after we top. I would much more imagine that the pattern will continue to break divergence up until we have achieved a blow off of some kind and then without cash available from shorts or buyers - a strong (possibly even waterfall) type selling reaction.

As an example:
Tomorrow: market opens, possibly makes a small downward test (as today) and grinds higher accelerating into even higher levels. 1090 for the SP500 would seem like a magnet if this were to occur.
The Next Day: market could open gap up reflecting total panic by the shorts and euphoria from the bulls, only to sell off hard and close red. 
This is simply one scenario to keep in mind. It could take until next week to happen. But I am not that excited about scenarios that would indicate a drawn out push. Breaking the divergence here at the top of the wedge, is highly emotional and seems to defy a type of calm reaction.

I think the goal now needs to be to retain composure as this move plays out, and to be prepared for a highly charged emotional environment. The VIX is already indicating as much. But, the setup seems to me to need capitulation.

The other thing of note is that the BDI (Baltic Dry Index) and DBA/DBC have not really participated in this push - that is not inflationary. Clearly paying through the nose for companies who do not need to buy commodities due to demand issues is out of sync with a truly inflationary trade. People are panicked. We need to be prepared for a buying panic that will quickly reverse and mark the top of this never ending wave P2.
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