Wednesday, October 7, 2009

Market Observations - Fake Out Shake Out

Nice consolidation day after two days of short, what's next? Well, since most people are focused on how high this move will go...I suggest we look a little deeper.

Upside targets are so close here that we can almost spit on them (pardon the vernacular). Gold 1085, Silver 18, SP500 1085 to 1100, Dow 10,100. This up move has been a torture I know. I have learned a lot about how insane people can be in chasing extreme government and special interest meddling can whacked the concept of herding really is once it has started. Now it is nearly complete. And we will likely have good excuses for some sort of emotional reaction. Ok, Alcoa reported better than expected earnings. And the Initial Claims numbers + Wholesale Inventories might be just the ticket. However, from my perspective upside is the one spike reaction that is left...most likely occurring sometime between tomorrow and tuesday.

Why do I think this? Well, first its the posture of the VIX. A spike high will bring the VIX back to testing its down trend line and horizontal support. These will likely formidable support. Oil. Oil has vastly underperformed my expectations so should have been able to break out of its pattern. I can not rule out a breakout...but so far...the action in oil is much too divergent from Gold, Silver and the Dollar to write off. The Russell 2000 index is substantially lagging the SPX...given the energy components and financials are the largest group in the index...this is a revealing condition. Distribution days are abundant on all equity indexes with uptrend lines directly above. Additionally, pullbacks recently have been getting larger at 39, 47 and 60 points. So, big cracks are showing. Then there's the Dollar itself. Supposedly, the dollar is dead, gone, buried...but it won't die. I think my alternate scenario will come to pass here as I indicated recently. A spike in inflation assets will be combined with a spike lower in the dollar...possibly into the 74.50's or 75's - but it does not have to go that far. Best would be to take out recent lows. Overall the chart of the dollar is looking pretty complete.

Again, I want to underline that the key to the market is the dollar. I have been working on several pieces chronicling China and JP Morgan. We should expect a currency move to drive the markets. China, is on life support - despite what the popular belief is. Not to mention Japan. A stress from an Asian financial system is something coming out of left field for most people...especially Peter Schiff or Marc Faber...but that is exactly what we are most likely going to get.

In any case, what I am looking for are elements that cause conditions for a swift reversal. A quick up/down reversal may not occur...and the market may want to drag this thing out...but I think everyone is too worn out for that...we should be watching for a reversal to occur just when everyone is analyzing targets for the up move.

If a quick reversal does not occur...fine - no damage done. But I think that it is appropriate to treat any spikes as high risk reversal possibilities...and err on the side of downside bets in those cases. If you ask, at this point, what people are expecting - I would think bears are looking for more torture and bulls are looking for continued upside. The only thing both camps are not looking for is a bullish move up and a bearish move down in the same time window. But that's what I am looking for.

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