Thursday, August 14, 2008

What's a Correction?

Top Line: Another up day on Thursday...we do not think this can last much longer. Options expire on Friday (the 15th) and that may put an end to the rally.

[Editor's note: As a reminder, the Update will probably be on vacation for the next week, with the next scheduled post on Sunday the 24th. Possible special posts may be available during the week, but no promises. Plus, we do have some new Jackson pics that may be posted over the next few days so come back on Monday for further info.)

Our position continues to be that this is just a corrective rally in a much larger downside move. What does that mean? Well, normally you think of a "correction" as a down move because the market "always" goes up so if it goes down it must be a correction. But, when it drops 20%, the media tells you it really is a bear market, not just a correction. Very Not helpful.

Here at the Update, we think the market can move in both directions and we try, heavy on the try part, to figure out which direction it is going. When the market moves in either direction, we can see it from a visual perspective. Then when the market moves in the opposite direction without violating the extremes of the prior move, that is a correction.

If you look at the Dow back in October (symbol INDU on, it was above 14,000. With the move down into the July lows, there have been a few up moves which never really got back up to where we started. Right now we are moving up from the July lows but have not even really made a dent in the drop from the 13,000 level back in May. Looking at the Dow, the move looks particularly anemic, not at all like it's about to jump back up to 13,000.

The picture over in the NASDAQ is a little different but has the same "structure" or look. If you look at the COMP (NASDAQ Composite) you see a "double" bottom at the March and July lows. This is generally a bullish development but in this case it doesn't look that strong. The NASDAQ has been stronger than the blue chips because the financials are getting hammered while the techs are enjoying the benefit of that money exiting the financials. As Fleck says, moving the Jell-O around the plate.

The NASDAQ stocks being more bouyant than the blue chips in this situation probably means that no one is at all worried about a sell off in the stock market. After all, the techs are holding up in spite of the news swirling around. As we have said many times, when the news doesn't match the market, we are probably in a "correction" and this time the news is bad and the market is going up. This can not last very long and it is just convincing many that the bull market is back on track and it is safe to put money to work in the market...we Know that the market is Not that easy.

Anyway, looking at these two charts, INDU and COMP, gives us a better perspective on how strong (or weak) any move really is. While the market can do whatever it wants, we think that the next move will be Strongly down and No bullish positions should be established. Yes, we were very early on our QID purchases but the SDS has not moved against us by very much at all.

When the market turns, many of these current buyers will turn into sellers. That would include those buyers who have weak Hands, meaning they will get nervous and sell, and those shortsellers who were buying to cover. In any event, buyers will be scarce in this next down move. The move so far has just been a correction and even with the huge feel of Power in the NASDAQ, those indexes are still below their early June highs and well below their highs from last fall (October/November). Going back to 2000, these indexes are Far from those peaks.

In two and a half years the NASDAQ Comp dropped from 5000 to about 1200 and then from the lows of 2002, we have seen a rally get to the fall 2007 highs five years later that were around 2750. Two years to drop powerfully by 3800 points and five years to limp back up 1500 points. That my friends is a correction and is begging for more downside.

FSI: 87.74 (new August high, below July highs)

VXO: 23.93 +0.93 (heading up to 50)

SDS: 64.49 -0.88
QID: 38.64 -0.98

Dow Industrials: 11,615.93 +82.97

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