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July 12, 2009

Couple Observations

The past week saw the type of action I enjoy most on the stock market: boring and profitable. Tuesday was really the only day that counted since the other four days posted minimal changes. As we'll see in a minute, however, the last three days of the week were important. The week ended with the S&P 500 holding support at 875, but a breakdown appears imminent:

s&p 500 daily chart

These crawls usually do not end well. I anticipate the selling floodgates will open Monday or Tuesday. I'm partial to Monday, actually.

Now for a word of warning. Take a look at this setup during the 2001-02 bear:

s&p 500 historical chart

Like the current setup, the rally out of September 2001 formed a rounded top on the heels of a waterfall decline. Like the current setup, the SPX had failed its 65DMA and the price pattern suggested an acceleration of selling pressure was imminent. So what happened next?

s&p 500 historical chart

Of course, I'm not suggesting such a shakeout rally is about to occur. The purpose here is only to be alert to possibilities. Another visit of SPX 950 would not undermine the bear case, but how many shorts would be able to hold through that rally? And how many of those traders would be able to re-establish their position when the market rolled over again?

Now for a quick word on silver:

silver weekly prices

Assuming our assumption is correct that silver began a major, new bull move off the October low, then the first wave of that move appears to have ended 6 weeks ago, as confirmed by the break of the trend line that defined that wave. The second wave will be consolidative and is not going to end only one week after the trend line break. However, this view does not mean the precious metal has to keep plunging here. Previous consolidative waves in silver have tended to form very choppy sideways patterns. I expect the third wave of this major cycle to be quite explosive... perhaps the most explosive (read: most profitable) move of the bull market. The third wave is not likely to start until autumn based on the the need for a handful of weeks for this consolidative phase to form a base, but this is not the time to lose one's position. My core holdings remain patiently intact, and if I am fortunate enough to spot the beginning of the third wave, I intend to really juice the Docfolio with metals.


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