Analyzing the downwave…

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=6&dy=0&id=p97142210271&a=214966864

300 point days in the Dow are no fun (unless you’re short) and it helps (somewhat) to have some idea of what the damage can be.  Naturally as we have pointed out many times forecasting is a highly undependable occupation.  Nonetheless there are tools to attempt to deal with the question.

We have discussed one of these in the past, the rule of seven.  Readers may read an article on the technique at this link. Note that we do not stand behind (or in front of, or beside, or anywhere near) this analysis.  Sometimes it works and it looks feasible in this case.  We computed the rule of seven targets on the present SPX market and came up with the asterisk targets you see on the chart.  (Not all marked.  They are 1364, 1331, 1265, 1066)  1264 is just off the bottom of the chart.  The original wave is that from Oct 18 to Oct 24.  This analysis may be taken as a proxy for the entire market –with the proviso of course that for individual issues their chart should rule.  And this is a powerful indicator of market condition and direction.

The targets in the industrials are; 12669, 12365, 11750, 9913.

It is very important that price has closed under the new high stop, 1387.  This is very probably a sign that more is to come.  Prudent investors often deal with events like this by hedging a part of their portfolio.  This can be done with the short ETFs — for the Dow DOG and DXD (2x); for the SPX SPXU (3x) and SDS (2x); for the Qs, QID and PSQ.  googling short ETFs will in general turn up some ETF to hedge your portfolio.  A further decline of 3% would cause more hedge to put on, and so on.

We will of course be monitoring the market closely and blow the shofar when the hedge should be lifted.  As always struggling against fate we try to make a profit on the hedge, which is possible, but don’t get your hopes up too high.

The gold and silver markets are buyable, if mercurial.  Stopped 2% under the low of Nov 5.

We are still bulls ( you notice we are not short) (we might get short) and expect this downwave to be short and perhaps violent, but after the unwashed are driven from the market (including the hedge funds (who are causing this downwave)) there will be another long up leg.

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