In my last article I described this market as dangerous to all traders due to its large price volatility. My view has not changed as of Thursday night and this is still not a position traders market.
Although my view has not changed, we are observing an easing of sentiment/fear basis $VIX and the market is at an interesting point. Friday the 31st of August 2007 sees the US market exposed to event risk due to release of data on personal spending and core CPE numbers but what is of immensely more importance is the Fed Chairman Ben Bernanke’s speech. The market is ultra sensitive when ever this man speaks, and the market has the potential to react accordingly. He has to frame his comments in a neutral to positive context. Any positive comment that signals a potential rate cut, could send this market sky rocketing. On the other hand, if Bernanke avoids discussing the US Federal Banks next move and makes neutral comments, it will mean more of the same price action that we have experienced of late with the market doing a full or partial retest of its lows. Either way I believe it is increasing the certainty of how this market correction is resolving itself and getting us closer to taking trades with higher probabilities of success.
In my previous article I wrote: “What should happen if significant support is found is that we should see a sharp bounce? If this happens do not get sucked in and interpret this as the bottom of the market. Remember my last article Certainty or Panic. (1st of August) The market has to test, and then re-test its lows before it forms a base and starts once again to trend up. For the market to rebound then fall for a retest, something has to push it back down post re-bound.”
We got the sharp bounce to 1479.40 basis $SPX then the market did nearly but not quite a 50% retracement of this move. By all technical measures we are still in a primary down trend with the 50 period moving average pointing down. Looking at the chart above any visual read of price action on a daily chart with its lower lows and lower highs confirms this opinion. The market is trending down and that is a standard read of this chart, but here is an alternate view that would support potential positive comments put out by Bernanke’s speech which would fit into the category of an information surprise.
We could develop a non standard read of this chart as follows. Once again I do not have a crystal ball and this is not a prediction but a potential scenario. There are a lot of bears out there and the market has a habit in volatile times of catching everyone off guard. Point A is important to focus on. It is a potential trend breaker and is the point where a short squeeze could occur. At point (A) the bears have to close their positions. It’s called a short squeeze. A short squeeze is where the bears all buy at once to close their short positions and in doing so create a huge push to the up side.
The trigger in price is at point A. Point A is important as it is the level which breaks the down trend and also gives support to a potential basing structure that I have observed and talked about in previous articles. Some describe it as an inverted head and shoulder pattern. I like to see it as a simple W pattern, with Point A in the middle of the W. The critical issue in support of the bullish case it that the market needs to break 1479.40 basis $SPX and hold above this level for any chance of a turnaround to occur. Until this happens, we are still in a primary down trend. This is the time to be in cash. Be patient. I am as eager to take a position as the next guy, but will only do so when the certainty of a positive out come is high.
Kind Regards,
Paul Wise.