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February 10, 2010

T Minus One (or Two)

The last few sessions have seen a whole lot of shakin' but very little movin'. The markets are due for a big move, and the question on everyone's mind is a matter of direction. Given that the swing high in the dollar is still intact and that we are due for a yearly cyclical low in equities, the odds still favor the direction being up. The only confirmation missing is for the market to deliver a bull run session (described in yesterday's post), and I expect such a session in a day or two.

There is an interesting pattern repeating in the NDX:

Nasdaq 100 daily chart

This correction has been characterized by two-day swoons in the NDX followed by three days of attempted recovery. The pattern is on its third iteration. Readers who have been with this blog longer than a fortnight or two are familiar with one of my technical axioms: the market gods like to repeat a pattern twice to condition the masses, then set the pattern up again only to deliver a different result. A sharp break higher here would fit the mold quite well.

We can also look forward to another potential such setup, but we first have to look back:

s&p 500 daily chart

If the market were to break higher here, we would have two corrections of nearly 10% which behaved as if a larger drop were imminent, only to turn and surge higher. After the last leg of this cyclical bull tops off, we are likely to see another 10% decline pause in similar fashion. Naturally, everyone will, at that time, be looking for the same result, but the market won't make it so easy. Stocks will gap lower next time, trapping the masses in their longs.


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