The action today in the broad market was a little bit confusing. It was clear after a few hours of trading that the market already knew what the news was going to be today and that is probably why we did not see 200 or 300 points down on the DJIA. It was just an all day long battle between the bulls and the bears causing once again pretty high volume and churning.
My bear fur continues to get thicker by the day and if it keeps up I am not going to need to wear a jacket as these days in October get progressively colder.
I was going to close out the TZA long today on a swift move in the sp500 to near the 1010 level but all day long the market near got cleaned out enough for me to take action. It just did not seem worthwhile to close out the position. It just seemed like an ‘absorption’ day where any bullish buying action was readily absorbed by heavy bearish selling. That does not bode well for next week in my opinion.
I think it is important to focus on the rising wedge pattern we have been dealing with since March 2009. This is an important technical pattern and as far as I am concerned the pattern is quite valid in form and internals. By internals I am referring to the repeated lower and lower and lower volume that has been persistent throughout the entire structure of the whole wedge.
The dead giveaway in my opinion was that ultimately weak day we had on the Jewish Holiday where we barely saw north of 100 million shares on the SPY, and yet the DJIA was up some 140 points to close the day. That is a superb example why volume is so important to keep track of because a big price move can make you feel confident, but if there is no meat to back it up then it is likely all smoke and mirrors and manipulation.
Anyway, it is important to realize that break downs from rising wedge patterns can be FAST and relentless until they reach their target. Here is a good article that talks about rising wedges and how price breaks down out of them. You can see from the examples and especially FIGURE 5, that the price move out of the falling wedge is FAST and relentless. In fact it somewhat looks like a mini crash.
Therefore I remain open to the possibility that the move we are going to see in October could very well resemble this form of rapid price movement. The heavy downside volumes in relation to volume on the upswings in the last week seems to confirm this idea.
I think it is prudent to ‘sit tight and be right’ on the short side as Jesse Livermore used to say at least for a good portion of October. If this rising wedge break down lives up to its expectations then we should be able to get a bulk of the decline sooner rather than later. I am open to some sort of rally developing, but I think in order for the rising wedge break down to be consistent it would not makes sense to see a really substantial price rally that makes significant headway into mid October. But of course anything is possible.
I really hate to use the word crash and in my previous post I indicated that I am not calling for a ‘crash’. But I must admit when I look at the size of this rising wedge and look at what the typical technical expectation of it is, then it would seem we could at the very least get some big and fast price moves that confirm the outlook of the pattern. So don’t get too hyped up on the ‘C’ word. Better to just focus on the technicals and the possible outlook of this pattern.
Also, you remember how last year during the epicenter of the bear market in October 2008 we sometimes saw rapid price moves depending on what was going on the passing of certain legislation (ie. TARP).
Well I must admit that I find it quite interesting that there is a possibility of a vote next week on the health care reform bill. I am speculating a little bit that maybe the market will turn down hard on a passing of this bill and get this falling wedge breakdown moving. Why? Well we already know that the ENTIRE country has very intense emotions about the passing or non passing of this bill. And certainly some of these people with all these fevered opinions also participate in the market.
If the bill passes, could it be possible that it would serve as a catalyst to cause a panic because of the general discontent about such a bill and what it would mean as far as government control and potential corporate difficulty and uncertainty?
The market is a capitalist enterprise and the passing of this bill MAY be perceived by the market as anti capitalism and you might see not only big funds selling but your average Joe too because of the wide reaching scope of this bill.
It is just a theory, but I can’t help thinking back to that period of 2008 with very heightened emotions. And let’s face it, the market is an emotional beast.