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Razor Burn


Good morning, and welcome back to the Kojak tape. After shrugging off negatives for three weeks, we walked into Monday with a handful of upgrades and some dovish chatter out of Washington. Naturally, the tape reversed 2% from the manic opening and closed near its lows. I'm not quite sure if the Minx has a secret partnership with the "hair club for traders," but she's doing a fine job of reducing the aggregate follicle count on the street! Speaking of wigs, Lord Tush called in this morning to let us know that the European bourses are slippy on the back of soft earnings from British Pete and a punk stateside performance yesterday. Double down of that Rogaine, my friends, today's gonna be a hairy one.

With tension on the street near DEFCON levels, you can almost hear the angst with each tick of the futures. I've always believed that if you hold onto the handlebars too tight, your bumpy ride will not be an enjoyable experience. The goal in our business is to be in a position to trade proactively and think clearly. If your risk profile doesn't allow that, you've got some manicuring to do.

While we must take our journey one step at a time, I must admit that my minds been aflutter as I attempt to craft a year end thesis. The thought that's beginning to crystallize in my keppe is a compromise, of sorts, that factors in the current psychology, the underlying fundamentals, the technical landscape and the structural forces. Granted, new data points will always present themselves and we must remain adaptive in our approach but, as of now, this is where I stand.

The tape is short-term overbought but there is clearly an underlying bid and a constructive psychology. Over the past week or so, the major averages have been relatively range bound with an upside bias. As you know, I'm of the opinion that the current overbought condition (and "extended" stochastics) will be resolved with a consolidation. The trillion dollar question remains: will that be a pause that refreshes (before continuing to rally) or the beginning of a bigger downside situation?

It's my sense that the resolution of the overbought condition will plant both the seed of doubt (for the bulls) and the seed of hope (for the bears). As a function of this, the weak longs will be shaken out while the anxious shorts are sucked in. After (if) this occurs, I could "see" another leg higher as fund managers make their last gasp bet for a yearend rip (ala 2001). It's my (humble) opinion that this second rally will ultimately fail and the crowded long side will get spanked (for a trade).

Now, I know better than to tempt the Minx with brazen predictions, so I'm going to approach each day with my right hand up, my head down and one foot in front of the other. We're sure to pick up a flurry of new data points from the conferences and I'm going to juxtapose those inputs against a short-term S&P support of 875 (then 850) and resistance of 905ish. For the NDX, I'm eyeballing short-term support at 950 (then 900) with a resistance of 1000ish. As an FYI, if the Dow Jones ticks at 8250, it will trigger a triple bottom sell signal.

I know that each day brings new readers to the site, so I must repeat that this is not an advice column. I use this space as an open forum of communication with the sincere hopes that, at some level, my nutty thought process adds value. This market has repeatedly flummoxed the most seasoned professionals and it will continue along the path of maximum frustration. It remains my big picture belief that capital preservation will be the most important investment thesis for the next 7-10 years but, with a little luck and a lot of discipline, perhaps we can make a few shekels along the way.

Good luck today.
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