Think the market is sure of itself? Think again. Today in conversation with Congress Bernanke hemmed and hawed when asked if he would tighten policy by Labor Day. The market paniced and from up (Dow) 155 points finished the day down 80 — a range of 178 points. You could discount this a trader silliness or as HFT traders bolting. Or you could look at the technical situation.
Today’s action is what is called a “key reversal day”. Higher high, lower close. And especially dramatic today, at the end (?) of a 132 day wave on exaggerated volume. Technicians think days like this mark the beginning of a short term trend change. Sometimes this is true. Here is a close up:
This wave, at 132 days is unmarked by any significant downwave, or correction. There is a short steep trendline convenient to price to mark what is almost certain to be a downwave. If the trendline below that were broken that would be uncomfortable. As it is there is some support at 14800 Dow, 1590 SPX. WE have been saying for several weeks that a downwave was just around the corner, and conjectured that it would be sharp sudden and violent. That was certainly the case today. The trendline break should be short and sweet, but as musical chairs is being played here there is no guarantee. Readers have experienced several short sell offs in the past months and have been well served by sitting tight and taking equity shrinkage with equanimity. The same tactic is in order here. For our part we partially hedged our SPX position (SPXU) and cold our QLD position. Let us assure our readers: We haven’t made money on one hedge this year. But like Laocoön in the grips of the serpents we never quit struggling against demon market.