Sunday, August 09, 2009

Just Waiting for Downside Confirmation

Top Line: The stock market seems to pivot on those employment reports and last week's report could be one of those pivots. We expect to see lower prices over the next few weeks, maybe into September.

The market failed to hold onto all of its gains late Friday and went out a little weak. The SP500 hit 1018 mid-day Friday and closed near 1010. The 1018 should represent extreme overhead resistance even though the market could rally Monday morning. The week end news was pretty bullish, meaning we would be very bearish, so most of the public is now confident in a market advance even though the market has already gone up 50% in a little over four months. Welcome to the party, but it's about over for now.

The message of the market is clear right now...tough sledding for the up move. More likely, the market is about to take all of those buyers down with it. The bullish consensus could bring more late buyers in after the weekend but there aren't many left, especially after Friday's capitulation buying.

Our comments on Friday morning still hold. The dollar has put in a pretty good bottom, it seems, and this gives us some confidence about the rest of the market. Strong dollar means weak stocks and commodities but strong Treasury bonds. We are looking for an increase in volatility due to falling stock prices.

GDX fell below 40 once again which should lead the way for stocks in general to follow lower. We are light on GDX after selling some of it last week so we are going to be looking to buy some more back here in the 30's, hopefully down in the 36 range. We'll keep an eye on it. We don't think it will punch through the low near 34 but it could give us another great buying opportunity down around that 36.

For now, we will continue to hold our bearish positions and expect the market to turn down from here. We say the turn will be subtle for a few days but it will eventually turn into serious selling. Too much bullishness will give way to selling and then Too much bearishness...which will be the time we want to get excited about the rally going into the fall or early winter.

We do need to see some downside to confirm our position that the market is going down. That would include a continued move in the indicators we mentioned above.


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Its hard to tell what the market will do from here.