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November 9, 2008

Dubya Bottom

Friday's stock market action laid out one of the strangest intraday paths I've ever seen. There were five directional changes (a typical day will see one major and perhaps one minor directional shift) which surrounded a 3-hour sideways consolidation pattern. This consolidation projected higher prices and, only minutes after it finally resolved higher, price broke sharply, approached the session lows, then launched in the closing hour to close at a new high.

spx chart

On a bigger picture, the SPX continues to hammer out what appears to be a solid base from which to expand its mid-term rally, but it's going to have to prove itself fairly quickly.

spx chart

As you can see, holding SPX 900 on a closing basis is quite important. For confidence to build about this past week's slump being corrective... which I believe will ultimately prove true... we need to see one of two things happen: 1) SPX 950 be taken out with volume expansion (which would kill the NRC setup) or 2) a quick drop below SPX 900 with a recovery to close above, also on expanding volume. This latter possibility kills the NRC setup and simultaneously hands us a reversal day. The worst case scenario would be to see a close below SPX 900 on expanding volume, especially if we get a second NRC day in between, as this action would set up much lower prices.

Commodities continue to get beaten with the ugly stick, but I'm not quite ready to call a near-term bottom. Granted, there are some indications of an approaching low: prices are severely stretched below moving averages and oscillators such as RSI are beginning to diverge positively. However, these indicators are not trade signals by themselves. We still need price to tell us the odds have shifted to a point favorable enough to justify a trade. Based on what I see on the charts... and this read is more instinctive than technical, so there are no pictures... I expect 2-3 more down days. The 2nd or 3rd day should print a nice price reversal and open the door for a shot on the long side... I suppose we could call it a "long shot" if we wanted to be cynical.

Nevertheless, I'm sticking with my moderate long positions on oil and the miners. Timewise, I expect a bottom to be in presently, so I'm not going to get too fancy trading around smaller positions. Once I see signs that the rally is on in earnest, I will bulk up. Curiously, a final swoon in real asset prices would conform nicely with the quick drop and reversal scenario on the SPX, so I am giving that possibility more than trivial consideration.

Should stock prices head higher from here, the SPX chart will leave behind a W-bottom, but given everything that lead up to this debacle, perhaps it will someday be known as the Dubya bottom. And on that note, a farewell to Dubya:


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