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August 21, 2008

Bear Scratch Fever

Today's equity action was quite labored, and it was a tough session to read for anyone attempting to correlate news to results. After a small gap lower on the open, the SPX looked like it was climing a wall of sand (as opposed to worry) as it worked its way 1% higher. It did so in the face of a six dollar spike in crude oil prices (and 12c for unleaded gasoline...uggh), while rumors of an impending "acquisition" of Fannie Mae and Freddie Mac by the Treasury circled about. The nationalization of the GSEs is something I've been predicting for two years, and the time appears to be upon us. It is obvious from their stock performance that the bail-out of Bear Stearns did not solve the credit crisis:

stock chart

Labored as it may have been, the equity rally did some damage to the near-term bear case as the SPX took out... and held... the 1275 level. This action leaves the recent break of the bear flag looking corrective:

stock chart

If one is to believe that the rally out of July is still a bear market rally, as this author does, 1360 would make a reasonable target for the end of the "C" move for an A-B-C correction.

stock chart

That target would certainly be pushing the limits of how far a coutner-trend rally should extend, but it is not impossible.

Such a move would be sufficient to throw all the wedge-shorters off the scent before a juicy sell-off. On the other hand, any sudden move that puts the SPX notably below 1265 would immediately bring bear play back into focus. As for myself, I already have a modest short position because in this environment a sell-off really could be sparked at any moment. I am treating this equity play very much like I played silver out of the end of last year: a moderate base position to carry until I see an impetus to push my bets.

Speaking of silver, I unloaded half of my long trade... which was small to begin with... into today's pop. I still view this rally as counter-trend, and I get nervous holding trading positions counter-trend. My long-term base position remains untouched, though considerably less valuable than a month ago!


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