October 13 2008 Astounding. Miraculous. Weird.
Speaking of the madness of crowds and herd behavior. Well, we were weren’t we? An 11% day in the Dow? As we said Friday short traders should have liquidated on the close. If they weren’t they took a pounding today.
Not only did the momentum change, but in all probability a new upwave started – also as we theorized Friday. The extent of this upwave remains to be seen. After the severe sell off of last week (7 days down) the “automatic bounce” is to be expected. (Some call it the dead cat bounce.) In fact the bottom is not really confirmed until Friday’s low is tested. In fact we think that this will be V bottom without a near term test of the Friday low. We theorize an extended upwave as investors pile back into the market afraid of missing the bottom and shorts panic and cover. (We would.)
Long-term shorts, which is what we are, regard the last two trading days with interest, but our stop is a considerable distance away. When this rally ends we will see if the Friday low is tested or taken out. The market may have taken the bit in its teeth but the market has not solved the mortgage crisis and the employment crisis and war crisis and the budget crisis and the national debt crisis and the health care crisis.
That being said, if an investor were heavily short the last two trading days some lightening up might be in order, in line with our frequently voiced principle of scaling in and scaling out. Technically this pattern is a short term buy signal. But conservative investors would do our favorite thing: wait.
The Wyckoff Accumulation and Bottom Model
Without unraveling all the keys on this graph, note at SC the panic bottom, at AR the automatic rally and at ST and ST 7 the test of the panic bottom. This is a model much respected by technicians because it has described so many situations like the one we are now experiencing. V bottoms are also entirely possible, especially considering the madness of crowds at present.