Wednesday, May 14, 2008

More Confirmation of a High

Top Line: The market gave us another signal that the rally is about over with its significant reversal late in the day. We might even say that Wednesday's highs will not be exceeded but that would mean the market would have to go up again to prove the Update wrong...

The market jumped out the blocks on Wednesday morning because, according to main stream media, the CPI numbers came in better than expected. We don't agree with either the CPI or that it was the reason for the rally. That doesn't matter anyway since at the end of the day the market closed lower than it started. Wednesday's reversal signals to us that the market is ready to continue its journey South.

The stock market looks ripe for a fall and, this being the Wednesday of options' week, we are not surprised to see a bit of a turn around. The best thing we can say is that the signs point to a major downturn right now and that's what we want you to keep your eye on.

In our last post we discussed the 200 day moving average barrier for stocks right now and we also mentioned the divergence of the NASDAQ and the Dow. It seems that this happened last fall when we started this drop. The NASDAQ did make a higher high in late October while the Dow did not setting up the same type of divergence that is going on right now. Too many bearish signs to ignore and we choose to be short--yes, we were a little early a couple of weeks ago but price-wise, there isn't much difference.

One other item is the Fibonacci retracement of the drop from the October highs. Looking at our favorite index the NDX, NASDAQ 100, we see that it peaked close to 2240 and fell to a low of about 1670 or 570 points. If you take a nice 0.618 Fibonacci ratio (golden ratio) to be the retracement percentage you get about 350 points ( 570 * 0.618= 352 ). This is a normal bounce and if you add the 350 to the 1670, you get 2020. Now, ask yourself this question, "What was the trading high in the NDX on Wednesday?" The answer is 2028 which is very close to the projected level of 2020.

FSI: 94.71 (All horsemen were down today after the big burst out of the blocks this morning)

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