Thursday, September 10, 2009

Get Shorty 2

Remain stubbornly of the view that another major leg down in the market is inevitable.  But in a society where just-in-time means calling ahead to say you are running late, it's not surprising that us punctual types are always early.

Rather than re-run the many reasons as to why fundamentally, sentimentally and technically this rally should be very near its use-by date, I give you this chart:

I will add to shorts if and (more likely) when we get to the breakdown zone around 4680-4740.  I'm expecting this resistance to hold first-up and, perhaps in tune with the prospect of index selling next week, wouldn't be surprised to at least see a retracement to 4460/80.

From there depends on how the top plays out.  On balance, given the strength of this move, the base case should be a parabolic blow-off to 5000 through October.

My thinking is that the market could turn on a dime at any time.  Hence the core short position.  But for a  near term reversal to happen it requires a catalyst (a sovereign default in Europe for example).  Given the internals of this market are built out of genetically modified straw, the spark does not have to be big (a small sovereign state default then?).

However, in the absence of a catalyst, a top is more likely to be found through sheer toe-curling exhaustion.  5000 is the level to target here.  It's a 50% retracement of the whole down move.  It balances the A and C waves nicely.  It's a lovely round number.  It would make for a nice view over the edge for a traditional October wipe-out.  Really, the only reasons I can come up with are technical cause everything else points down - now.

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