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A great week for Sammy


We began this week with Iraq announcing they would not destroy missiles and the market dropped believing it would unite the world and war would be coming soon. We end the week with Iraq announcing that they will begin to destroy the banned al-Samoud 2 missiles. SHOCKER Fokker! (how come I love saying that soooo much) The only predictable part of the market right now is how Saddam is playing the world like a violin. That is not a political view; it is the reality the markets have to deal with on a weekly basis until there is some resolution to the situation. There are many trading nuances that take place each day, but unless the market does something unexpected today, the major equity indices are likely to end near where they began the week.

Am I missing something by just looking at the indices? Did something happen within the markets that suggest digging deeper? I always dig deeper and what I found was that I am still struggling to find an interesting way to say the same thing I said on Monday. Usually something happens during the week so that Friday could be a nice summary of the week's action. Not this Friday though. Need an example? I ended my Monday morning article with;

While I expect one more leg down, which would get my intermediate-term indicators to levels that have preceded an important low (not there yet), if Iraq does comply and destroy the missiles, the market would likely jump. The potential of that should keep the short players at bay to some extent, which buffers the downside, but also saps buying power on a jump, thus making it likely temporary.

That seems to have been what happened. There is a tremendous urge for all interested parties in the financial markets to make each hour, day and week like it is a "pivotal" one. This week just wasn't. The geo-political backdrop is no closer to identifiable resolution. Sure, we may be one week closer, but that was the case two months ago as well. The economic and corporate earnings backdrop is no closer to signs of a more positive outlook as highlighted by the earnings report from Hewlett Packard (HPQ) and the lack of movement for the week has done nothing to change the intermediate-term technical picture.

The reality of the market (my reality, which can be rather strange) is that in order to have a big direction one way or another, there needs to be motivate seller or buyers. Right now those don't exist. In an environment like this, there can be quick swings in the tape based on short covering or nervous selling, but has anyone noticed that after that quick move there is zero follow through? That is a result of limited conviction in both bull and bear camps. What I try to remember is the importance of looking past the immediate action or news to look for a discernable change in the overall landscape. I have not found such a change and until there is one I see no reason to alter my outlook.

So big shot, what exactly IS your outlook (I hate it when I talk to myself because I am my own harshest critic)?

I continue to believe that all indications are for a market likely to create another intermediate-term low over the very near future. That is why I am not urging my clients to sell and am instead suggesting that they get ready to buy. You can get there in one of two ways; sharp price decline (5-10%) or a few more weeks of grinding sideways action which would allow the MACD, RSI and other proprietary indicators to catch up to the intermediate-term oversold nature of the stochastic.

Once that intermediate-term low is in place (should be very soon), the market is likely to have an explosive move higher like the countertrend rallies that began last July and October. The main point is that there are times when selling can look smart over the very near-term, but look not so smart a few months later. Selling would have seemed pretty smart in the last week of September, but by the second week of October, the market was way above those levels.

It seems difficult to believe that the market can gain significant momentum with very few of the near and intermediate-term indicators confirming a more important low. As I said earlier, I expect the intermediate-term indicators to reach levels, either by whoosh or grind, that kick started prior countertrend rallies. I continue to go with that strategy and because of time proximity, I am looking for the place to get long vs. selling after three years of a bear market and in the third year of the President's term, which has not been a negative year since before FDR.
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