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"Shock and Awe"


When I finally climbed into bed last night (after reading a few kids books) my mouth was hung open. I couldn't believe how there were cameras on Hummers racing through the Iraqi desert with our troops. That in itself again shows how this isn't actually a war so far, but a military incursion to defeat a dictator. Obviously the top commanders are trying to send a very clear message to the Generals in Iraq and want everyone to see it. So far, the strategy is brilliant as the "white knight" scenario plays itself out. The world was concerned how it would look with buildings burning and expired military personnel along the streets of Iraq. So far that hasn't played out and the world and markets are responding favorably. Regardless of market opinion, the lack of military casualties on both sides so far is awesome.

In my world of market strategy, I underestimated the near-term potential of the market. Over the past week, the major market indices are up roughly 10% and appear to not want to pull back. I would love to be able to say that the "all clear" sirens have been sounded because the military effort is going well, but unfortunately, that isn't my view. Despite the gains, no major trend lines have been breached, the market indices and their components have reached the highest near-term level of overbought levels since the bear market began and the tape is set up for negative divergence one week after making a positive divergence (Exhibits 1&2). Basically, I remain skeptical as I have throughout the one-week move that the rally is going to be sustainable because the market has reached near-term overbought levels that suggest an imminent pull back at a time where the bounce hasn't made a higher high.

Clearly I underestimated the near-term potential of the rally, but I don't want to make a second mistake and overestimate the near-term potential now, as my indicators and instinct suggest some level of retrenchment.

Exhibit 1 - This level of overbought suggest buying AFTER the 10% move makes little sense using a 14-period stochastic

Exhibit 2 - The same holds true for the RSI

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Way to go troops - keep up the good work!!!!
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