Tuesday, July 31, 2007

A Nasty Down Turn

Tuesday's action in the stock market can only be described as bearish with the Dow collapsing at the end of the day after being up strongly in the early going. As the market opened on Tuesday, the Dow jumped about 140 points in the first hour or so. When we read about the day there was some talk about AHM, American Home Mortgage, the company we discussed here last night and higher oil as the two leading "causes" for the decline. Well, we can't really understand that as well as that there really was no real "reason" for the decline, which should be very scary to the bulls.

Markets like to be able to explain why things happen and today's explanations just don't hold water. Yes, it is true that AMH did have a bad day on Tuesday, down 90%, but we knew about that a day earlier so the market had to know about it sooner than that. And, normally the Dow and oil have made new highs for the move together looking back on the past several years of trading.

Our caution to you is that in a bear market the rules can get a little bent or broken especially if you are looking at the rules that "work" in a bull run. Tuesday showed up early and fade to Black late which is what happens in bear markets. This is just opposite of what happens in bull runs where markets will get scared in the early going and sell off but manage to rally the rest of the day.

Bear markets are especially treacherous for traders and Tuesday is a great example of that. The market has made everyone who buys dips look like a genius for so long that now buying dips seems almost automatic. Except, today for the first time in this Bear move, the market did not reward the, pardon the expression, "dipsters".

Most of what happened late on Tuesday should help convince some that a change has occurred. As these people are now convinced, we rather expect a bounce off Wednesday morning's lows. Oh, we haven't had a chance to mention the futures market this evening. We should probably do that first. As the evening has worn on, the overnight futures markets are falling. This seems so out of the ordinary because it has been a very long time since we saw the futures show these extreme numbers. There doesn't really seem to be much news to explain it at least as far as we can find but the market is down hard this night.

We think the Dow has a chance to get down to 13,000 as early as Wednesday morning, and, as we mentioned above, there could be a bounce that would occur at that time. Calling for a bounce is not a trading idea just a guess as to what might happen in the morning. We don't even know if the futures can hold their negative positions all night, although we expect they will.

At any rate, we are in for an interesting trading day on Wednesday to start out the month of August. There should be some extreme price moves will be caused by some recognition of the bear market that is starting. Come back for the full Wednesday Update tomorrow, there should be much to discuss.


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