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With the monthly payroll data coming up tomorrow, I thought it would be a good time to speak about different degrees of trend with respect to psychology. Regular readers are by now well aware of our view that asset markets are far more driven by the attendant psychology (bullish or bearish) underlying stock market participants' behavior than by any rational, cortex-driven assessments of economic logic. Conclusions like what a cheap stock is, what the net present value of future cash flows are worth, what is risky, or safe: all are driven not by some scientific logic and mathematical equation but rather by the attendant bullish or bearish psychology surrounding the exercise.

Anyone with a modicum of experience in asset markets knows that such universally anticipated events like an FOMC meeting or a payroll employment report act as a sort of cathartic event. That is, such events typically (but not always) act as bifurcations, as pivot points, for the larger degree trend already underway in the underlying psychology of the marketplace. They can act to provide a "blowoff" (final) phase to a trend up or down or they can act as the "point of recognition" phase to a trend, where the dominant (larger degree) trend becomes clear.

Tomorrow's employment report will be no different, as the underlying short term trend (as we've been following it with our Elliott wave, Fibonacci, and Demark work for the last few weeks) is clearly up from the 8/13 lows. But is up within the context of a larger degree downtrend from the Q1:04 peaks. And further, as our intraday flash made clear today, that short term uptrend from the 8/13 lows is coming into some very important resistances and showing some usually important trend exhaustion signals.

Net/net then, we have a dominant downtrend in place from the Q1:04 peaks, a short term uptrend from the 8/13 lows that is showing multiple signs of nearing exhaustion, and we have a universally anticipated macro event in the form of payrolls tomorrow morning.

These are precisely the set of initial conditions one would expect to provide such a cathartic event for aggregate psychology. At such times, the actual number really won't matter: it is how the number is perceived relative to the trend of, first, the short term psychology, and second, the long term psychology, that matters.

With bullish sentiment right at the peaks in extremes seen at every important price peak in stocks this year (see the intraday flash note for details), what are the chances that the employment report is going to be viewed in a wildly bullish fashion?

To paraphrase Pearl Jam: "it's resolution, baby."
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