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October 2, 2008

Johnny Be Good

Well, wasn't that just unpleasant. Equity markets did no one any favors, slumping 4% in the wake of the Senate's bailout approval. House approval doesn't seem relevant at this point, as final passage is all but a certainty. So instead of a moderate rally into which we bears could build shorts, the market short-circuited us and headed directly lower. My screens were the victims of a plethora of irritated glances as I sat watching the sell-off with only a miniscule short position in the form of short calls on the homebuilder ETF.

We now have three consecutive days recording ranges contained by the lower half of a large sell-off:

index chart

These types of consolidations usually break lower on Day 4. Given the NDX set new bear market lows today and the fact there is apt to be quite a bit of fear percolating into the weekend, I think there is a better than even shot at seeing another nasty sell-off tomorrow. I suspect any further selling would bring us pretty close to the end of wave 3 of 3.

index chart

I imagine wave 4-of-3 will be a 4-6 week affair as price tries to regain the downtrend channel. The big question at that point becomes: does wave 5-of-3 form a double bottom as did wave 5-of-1 or does it plunge us to new depths? We'll have to attempt such judgments at a later date.

The only fortune keeping me from being outright depressed about missing today's equity action was the short position I took on gold last night, which was based on the read of gold's chart posted in yesterday's wrap:

gold chart

Here is what gold actually did today:

gold chart

Silver was hit even harder, down nearly fourteen percent! That's a one and a four without a decimal place in between. Today's slaughter of precious metals removes all but a modicum of doubt that they are in a cyclical bear and also springs the bull trap I've been discussing for a couple weeks. I expect gold to work its way back down to and below the September low. Therefore, I will continue to trade metals from the short side as opportunity presents.

A couple other observations:

The slaughter in copper continues.

copper chart

Transports are now making lower lows and lower highs.

index chart

It would take no Johnny Cochran to close the case for a bear market now.


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