The straw that broke the market’s back?

November 20 2008

Another 5%+ downday and further vindication of our cautious refusal to try to catch the falling knife.  Whether this is the definitive breakout of the range remains to be seen.  Markets habitually set traps, and this may be a bear trap.  Nonetheless it is a sell signal.  Magee would probably like a little more action on the downside, but if you sell new lows and buy new highs, which is what you should do by our lights this is a signal.  In our last letter we identified the probable targets.  Frankly we would expect a rally here but would short more anyway, if adventuresome.  We would set a money management stop, 7% above the entry for this unit, rather than the Basing Point stop we calculated in a previous letter.  Here is the bad news:

The pattern in the S&P is even more definitive, and probably more representative of the true state of the market.

This could get nasty.  Oh, you thought it was nasty already?  We will post another letter today which may lift your spirits, or at least amuse you.  Don’t touch that dial!

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