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December 1, 2008

Scenario C

With today's 9% slump in the S&P 500, bears are sitting around licking their chops on a post-Thanksgiving feast, and traders such as myself who believed the mid-term rally had finally arrived are picking up the tab. How many crashes can one year contain? Wow. Today's action certainly does not constitute the trend line crawl I was looking for, and scenario "C" seems to have grabbed top honors in the list of probable outcomes.

Just for the sake of obscurity, please note that I wrote that scenario "C" is most probable, not that it will definitely occur. Also recall from the original post on the subject that the tell-tale sign of scenario "C" unfolding is "a rejection by the trend line on strong volume." Italics were added to highlight the important deficiency in today's session:

index chart

Of course, in tamer markets no one would ever imagine a 9% drop being a head fake... even on weak volume... but this market has been anything but tame. The SPX also handily violated the 850 pivot... not a healthy sign. Just the same, I have not flipped short, yet. There is something in the back of my mind nagging me about this move. Until I figure out what it is, I'm going to stay positioned nearly flat.

I have an inkling of suspicion that part of the nagging is related to the buck. First, stocks took a fairly nasty punch for a mere half-percent dollar move. Perhaps the market was just catching up on last week's divergence? The second reason is terribly unscientific:

dollar chart

Sometimes a trader's instinct is his best friend. I guess we'll find out tomorrow if my friend is true or just a true prankster.


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