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Predicting the impossible is impossible


We open today with those that remain short more nervous than those that remain long as we head into the Blix report on Iraq and extended weekend. How does one know when there is a high enough level of angst that could lead to some kind of bounce?

The bottom line with yesterday's bounce toward the end of the day was that anyone who wanted to sell had likely done so. EVERYONE was saying that the market couldn't rally heading into the long weekend, which suggested that there were no sellers left. If everyone was saying it couldn't rally, do you think they were still long as they said it? Rumors were everywhere of "Terrorist Alert" upgrades and New York City Hospitals being told to prepare for incoming. The longs were out and the shorts were in as the bets were obviously being made. All you need in that type of environment is even a little buying to spark a rally.

The key questions are how long does a bounce last and how far can it go? For one minute, lets put the incredibly volatile news in the background because it is impossible to predict what will come out and even more impossible to predict how traders may react to it. Let's use what has been working over recent days. The market is in a very clearly defined downtrend channel on the 60-min charts. Part of my reason for expecting a bounce yesterday was the proximity of price to the bottom of the downtrend channel and how oversold the market is on a near-term basis. Todd has done a fantastic job of painting you the trading landscape, which is essential when viewing near-term charts.

Based upon what I saw and what he was saying, I concluded that a bounce (especially given that people were more concerned about buying plastic sheets and tape than buying stocks) was very possible. Yesterday's bounce brought the S7P 500 (SPX) and NASDAQ 100 back toward the middle of the downtrend channel, which means that chasing the opening might not make sense because the upper end of the downtrend channel lines are likely to be reached. I put those between 825-830 on the SPX and 970-975 on the NDX (remember that is sloping down which means as each hour goes by, the upper end of the channel gets lower in price).

I want to reinforce that I continue to believe that in order to have a more significant sustainable rally, the various indicators that I use should come at least within earshot of levels that have been associated with meaningful intermediate-term lows during the past three years. The markets are not yet within earshot and the indices are no longer at the lower end of the very near-term downtrend channel lines so my reason for expecting the bounce is no long valid. While a bounce may continue, until; (a) the indicators get oversold enough on an intermediate-term basis, (b) there is some resolution to the Iraq situation, (c) valuations come down either by price deterioration or surging fundamentals, upside is likely to be used as opportunity for sales vs. something to get overly excited about.
Happy Valentine's Day - Ohhhhhh Daisy you shouldn't have
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