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November 16, 2008

Nasty Swings

It's amazing how quickly the market setup swings from constructive to ugly these days. Only a week ago, the mid-term rally was looking healthy. We had just seen a strong ramp out of October, carrying the S&P 500 nearly 20% off its low, and even the selling near the end of the previous week appeared to be routine retracement activity. Then we returned to ugly by selling off sharply at the beginning of the most recent week. Just when the mood was at its gloomiest, the market gods gave us a monster reversal... an 11% swing in a single day on healthy volume. Looking constructive again, we opened Friday with a sell-off that reeked of correctiveness... and eventually proved so... as stocks rounded out of the daily low and headed to new rally highs.

And then 3:00 happened.

index chart

And now once again, the setup is looking nasty, at least on the intraday view. If I were allowed to look only at the 5-minute chart, I would say this market is destined to crack to new lows, and quickly. However, the daily view still offers some optimism. Friday's drop occurred on less volume than Thursday's ramp, and price is still considerably stretched below the 65DMA.

index chart

Also note the similarity of recent action to the end of Wave 1 of this bear market:

index chart

So the possibility remains that the last hour of the week was a big head fake... a quite costly one to those, including the author of The DOCument, who had concluded the day would rally into the close. One thing that bothers me is the look of banking shares these days.

index chart

stock chart

If we are to see the mid-term rally materialize here, it is going to have to be done under the guise of optimism from the financial sector. We simply cannot embark on a multi-month rally without the widespread illusion that the banking crisis has been mended. I'd really like to see Friday's highs conquered by both the SPX and BKX as we begin our new week.

 

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