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October 15, 2008

Super Crash

In the last post's comments section, I stated that although the market was gapping lower on the open today, I didn't expect the day to turn into a bloodbath. I was wrong. Equities experienced a bit more leakage than anticipated, with major indices shedding in the neighborhood of 9%. The session spent the last half hour in freefall. After opening the week with a 17% head start, the S&P 500 is now up less than 1%. This is scary stuff. The extent of today's drop makes the A-B-C form expected for wave 4-of-3 considerably less likely. Instead something more sinister may be materializing.

index chart

If wave 4-of-3 should form a triangle, it would look eerily like one of those mid-point consolidations for a waterfall decline about which Gary has educated us. If so, the target for wave 5-of-3 once the triangle consolidation broke would be in the neighborhood of SPX 500.

SPX 500.

I'm going to let that sink in for a bit. Go get a drink and come back for the rest of the post.

Gloom and doom aside, there are a few items in the market's favor, though they provide only tottering support. First, volume receded today, meaning that the selling, although sharp, may have simply constituted folks locking in quick profits and/or dumping remaining longs after last week's scare (of course volume tends to recede as triangles form, too). Second, panic indicators, such as VIX, the put/call ratio, advance-decline volume, and bullish percent readings, were at historic extremes Friday, but did not spike back to extremes with today's move. This divergence may work positively for the market. Finally, the financials have been outperforming the general market. The BKX spiked 37% from Friday's low, compared to 23% for the SPX and the banks fell 7% today versus 9% for the market. One would think the financials would underperform if things were still in meltdown mode.

Any of these positives could change tomorrow, of course, and it's also still possible for wave 4-of-3 to take on a distorted A-B-C form, followed by an aborted wave 5-of-3 and then the multi-month rally we've discussed. History supports such a rally, but I unfortunately have no strong feeling for how one should be positioned right now. I personally went to all cash save for the equities I mentioned earlier, which make up about 15% of my trading funds. I will probably dump all of those save for BP and EWT tomorrow. I want to have as much cash on hand for when I see a situation clearly because I think the opportunities will be large. There is no need to constantly have a position, especially in a wild market.


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