Corrective Up Move Underway

Market Action:
Tuesday’s market was clearly the opposite of what we have been watching for the past week or two.   The Bears were literally hibernating all day long.  With so much bearish activity, the bears needed to rest.  All the major indexes were up over a percent with the RUT (Russell 2000) up almost 2.5%.

Opinion/Analysis:
While we thought that last Thursday’s 200 spike low at the opening was probably the end of the first wave down, we may have to revise that based on the trading over the past two days.  Monday’s lows should be the bottom of the first wave, even though they are not much lower than last week’s low.  Tuesday’s action shows that the bull party is just beneath the surface.

This type of reaction is typical after a first wave down.  Most analyst’s are bullish and one itsy bitsy drop like this last one is a big opportunity to be buying stocks.  That is what the corrective up wave is supposed to do, make everyone feel like the down move is over.  We think that market has a few more up days in it before this second wave is complete.  And, as we have said, the bulls will make the up days violently so.  

Tuesday’s market was extremely strong technically, which is exactly how you know we have seen the end of the first wave down and the beginning of the second wave which is a corrective move.  Unfortunately, the end of this move could be a long ways up from current levels.  We guessed, using typical retracement factors of 38%, 50% and 62%, at where we think the corrective up move will go.  The Dow could make it back to the 12,500 level and if/when it does we will be getting much more bearish again.

This move up is a good time to be positioning for another wave down.  That means to be selling strength and to be concentrating on how to preserve principle.  There are a few days now to take care of business.

New Philosophy of the Wednesday Update:
This will be the last time we will be recommending things for you to do.  We will concentrate on what we are doing and let you know what those are.  These change periodically, even during the trading day sometimes.  We are much bigger (and hopefully, better) traders when the trend is down.  When the trend is up, less trading is necessary.

Bear markets are very difficult to trade but they are also devastating to portfolios.  Our purpose has been to help you find a way to get out of harm’s way, by moving into cash.  That strategy has done well for several years.  

We anticipate that 2007 will be a difficult year to make money in the stock market being long.  We are therefore maintaining our leveraged short positions.  This should be a good year for trading.

Dow Industrials:  12,207.59  +157.18
VIX: 15.96
HUI:  328.31
QQQQ:  42.85
RYVNX:   17.65
RYAIX:  21.92
RYCWX:  37.22
TLT:  90.08
BEGBX:  13.83