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October 16, 2008


Another day, another 700-point range on the Dow. The next time we see a mere 300-point range, it's going to be downright boring! Despite the nice end-of-day recovery, nothing changed regarding the potential near-term outcomes. Equities turned higher precisely where needed to stay on track for the triangle consolidation postulated in yesterday's wrap. We can see the formation clearly on the 60-minute SPX chart:

index chart

If our potential triangle turns out to be a mid-point consolidation of a waterfall decline, we are facing financial doomsday. I will short this market if/when the upper boundary is tagged, and if the pattern continues to follow the doomsday pattern, I will add to my short right where the arrow from the annotation is pointing. A significant breach of the upper boundary will also provide for my stops. Of course, if things play out this way, I just hope there will be a financial system left to hold my cash!

The other possibility is that today's drop and pop constituted a successful test of the wave 3-of-3 low. If so, we're looking at clear skies for several months. However, it would seem quite unlikely that waves 4 and 5 of big Wave 3 would unfold in just four days after waves 1 thru 3 covered six weeks, and frankly, the possibility that today constituted a successful test of the lows simply seems too easy to be viable.

A final possibility can be derived from the crash of 1929:

index chart

The candlesticks for late October and early November 1929 look eerily similar to what just unfolded over the last several days. Perhaps we'll just see four more days of frightening selling. Now that should get enough bulls shaken out to set up our multi-month rally!

Precious metals got tagged again for about 5% a piece. Gold was acting quite weak this morning as its early pop faded quickly. I decided I wanted a short position rather than a hedged position, so I took off the long silver half of the paired trade and reduced the size of the gold short so as to control exposure. The move worked out quite well as gold tanked over $30 in the next 40 minutes.

gold chart

Despite my bearishness on gold, I am quite jumpy about all trades these days and closed out the aforementioned gold short in less than an hour. I'm back to 100% cash until I see something I can jump on.


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