Monday, October 26, 2009

A Real Breakdown or a Trap of the Bears? Do we Rally Sharply on Wednesday

There have been many things that one could describe as "remarkable" the past 2 years... I've lost count.  But for the technical crowd one thing I read over and over is how astounded people are by the reversals we have been seeing once any support is broken.  If you live on a grassy knoll, you might say "large forces with a huge stake in creating the appearance of prosperity" are no dummies, and have their own set of technicians letting them know where it is most important to provide support.  That's a whole different discussion.

What cannot be argued is we don't seem to have consolidation and gentle rebounds once a support is broken.  I've gone back the past 3 months and looked at every break of the 20 day moving average... today marks the 4th episode.  Again I cannot stress how vicious this market has been to bears - you expect a break of support to give you some downside action (at best) or some sideways consolidation (at worst).  Instead of either of those scenarios, all bears have received the past few months on these breaks are things not fit for print.

Notice the exact same pattern - a break of the 20 day moving average (marked with green arrows)... then within 2 sessions *WITHOUT FAIL* not just a rebound but an incredibly steep rebound.  Which of course is then followed by shorts scattering like dust in the wind, and a furious multi session rally.  Just random chance we see the same pattern over and over you say?  That would seem doubtful - the invisible hand seems to be quite active these days.  [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team]

We spoke Friday of a (potential) change in character ("sell the news") - but surely in each of those earlier episodes the past 3 months the same "hopeful" songs were sung by bears.  It is a dangerous spot for both bulls and bears here... mostly because the rules seem to be quite different now than what those of us with experience are used to.  So if the same vicious reversal pattern in 2 days happens, the dollar should be sheared into pieces Wednesday and we'll rock and roll as if this selloff never happened...

Can it really be that pathetically predictable? If not, we want to see a break of that 50 day moving average - and bulls to have fear for the first time in a long time. But until a pattern breaks - and this is a quite obvious one - you have to respect it and assume it continues to work.  Confidant buyers will circle the wagons on any weakness from here, with the expectation that bear hides are to be strung by the end of the week.  Of course, eventually that will be incorrect and we'll see bull horns as trophies rather than bear hides.  But there is really no reason to be predictive here unless you have very tight stops and even shorter time horizons.  The next 48 hours should be interesting.

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