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The Phase Craze


The most vicous rallies occur during a bear market. Right, Toddo?


Good morning and welcome back to the art of war. With last week's seeds of hope sprouting into yesterday's sea of green, the bulls have once again staked their claim and squeezed their furry friends. Indeed, the chatter has already began that this is more than a technical bounce--it's the beginning of something beautiful! Can it be? Was that it? Will Thursday's duct tape reversal lead to the stickiest rally of the year? It's Hump Day in Minyanville, boys and girls, and we're back in the home digs--so shovel yourself a patch and let's get to work!

I've always liked to break trading moves into three parts: denial, migration and panic. It's not a flawless approach (what is?) but I've found that through the years, significant moves in the marketplace typically exhibit these three tendencies. The definition is relatively self-explanatory. Denial occurs during cusps when the trend changes from bearish to bullish (and vice-versa) and nobody believes we've turned the corner (shorts press or longs average down). The migration is characterized by the masses realizing the shift has occurred and repositioning themselves accordingly. Finally, the panic is the emotional scramble to make up for lost ground (either way).

While I sense that we're currently nestled between the migration and panic phase of a bear cycle, we must acknowledge the potential that we've entered the denial phase of a bull cycle. As you're aware, I zagged last Thursday and decided to play the quick schnitz higher--but "punted" the other way as the masses "caught on." Why, you ask, did I view the rally as a bounce rather than a turn? For one, the historical fear gauges never reached compelling levels. This isn't a precursor, mind you, but I like to see rampant despair before playing hopalong Hoofy (particularly if we're looking for a trading bottom). Also, the intermediate term indicators that Tony has been all over never gave us the "all clear" and, before the much discussed Sham triggers (higher), I would like to see this.

Does that mean this is rally doomed to fail? Well, in my most humble opinion, I would say YES...eventually. I seriously doubt that the grizzly is behind us and my dilemma remains one of timing. That said, it doesn't matter if we're dead on with our thinking if we're too early (or too late) with our execution. When we first discussed our Shim Sham, the S&P was at 850. We were looking for a rally to 870 (got it), a hard fail and then a stiff lift. The zillion dollar question for the Minyans among us is: Did the 65 S&P point sell-off qualify as the Shim?

I continue to remind myself that, during the meltage, I was earmarking S&P 810 as a downside target and we pretty much got there. My issue was (and is) that during the stair step lower, the decline was entirely too orderly for my liking. There was palpable fear on the streets but despite the grind lower, we never saw the disconnect enter the market. Were too many people focused on these indicators for them to work? That, my friends, remains the potential fly in this entire discussion.

Whatever the case, the only way we'll safely reach our destination is by taking the journey one step at a time. I know this is a frustrating environment--I'm living it right alongside you--but don't give in to the temptations of frustration. The mechanics of the swing are often as important as the results of the at bat. Dust yourself off, dig into the box and let's take today's cuts.

Good luck.

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