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March 1, 2009

In Like a Lion

Looks like next week is going to be nasty. Equities gapped lower Friday and didn't even manage to close the gap before failing and going out on the session low. The last ten minutes, in fact, saw the S&P 500 shed over 1% in what seemed like outright panic going into the weekend. Volume confirms a panicky atmosphere and the whole situation reminds me of the breakdown point of early October.

stock index chart

I don't know if we're going to see a one-day crash event or a multi-day bloodshed, but an accelerated breakdown appears to be in the cards. Obviously, my opinion sports a marked difference from the call for an immediate back-test of SPX 805, but as circumstances change, expectations change. Even so, I suspect the impending panic sell, should it occur, will mark an important bottom... not the final bear market bottom, but an important one. Here's why:

stock indicator chart

stock indicator chart

stock indicator chart

stock index chart

stock indicator chart

I'm not sure what to make of the massive $578 million of buying-on-weakness seen in the spyders Friday. The buying certainly could jive with the bottom being near, timewise, but it would seem strange for big money to pull in such a big line right before a big price drop. In any case, it is only one counterpoint to a pile of indications suggesting another waterfall decline. If we get a few BoW days strung together, I'd take it as an indication that a larger counter-trend rally is near.

Let's take another look at the ominous monthly view:

monthly index chart

At some point we will back-test SPX 805, but it now looks like the move will occur as part of a larger counter-trend rally that eventually rolls over into the death-by-a-thousand-cuts phase of the bear market. Let's see if we can determine where such a rally where begin. In other words, potential price levels for the end of our current decline.

stock index chart

stock index chart

There is no hardfast rule stating measures for the loop breakdown, but we are speculators, after all!

monthly SPX chart

For those of you who appreciate Elliott Wave analysis, it appears the triangle served as a Wave 4 consolidation of the primary bear market wave off the October 2007 top. We are therefore now in the midst of the Wave 5 panic which will end the primary wave (part "A" of an A-B-C). Once this wave finishes, we will enter the "B" wave (the aforementioned larger counter-trend rally) before sinking into the phase in which all hope is lost. Previous expectations for a near-term test of SPX 805 would have simply constituted a back-test of the triangle break before entering the next nasty sell-off (which we expected, anyway). As a testament to market weakness, the back-test was precluded.

So, if my read is accurate, we are set to lose another century mark or two off our favorite index. As for my play, I am currently short the SPX via futures I sold Thursday night (about the time I noted in the comments section that I saw a gap down coming Friday morning). I am also holding my long on Sprint Nextel. I intend to trade Sprint by its chart alone. I'm sure there are dozens of other juicy shorting opportunities, but I intend to trade only the SPX. I expect the action to be tumultuous, and I don't want to lose focus by managing too many positions.

The pull-back in precious metals is certainly behaving like just another minor correction.

gold chart

As long as our little yellow friend holds above that downtrend line, I'll be holding my precious metals positions and looking for places to push them. Furthermore, platinum, which for some reason has tended to lead the group, is close to breaking to new highs for the move. I can't explain why platinum would lead, but I'm not going to debate an indicator that works.

The very short-term action in miners suggests a bit more of a pull-back:

stock chart

A further slump in mining stock prices would not be out of line with a rapid drop in general stock prices and would certainly be a gift to us precious metals bulls. Short-term RSI is oversold, so I'm not going to get my hopes too high, but as you all know, when prices are moving quickly, RSI doesn't matter.

Okay, folks. This post won't rank with the best of my efforts as I am still on the road and not in the mood to bother with the regular editing process. Feel free to shoot some questions or criticisms and I will either clarify or pretend I didn't mean what I wrote, as needed.


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