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Quoth the Raven, Everquest


Good name. Investors in the IPO would have been forever in a quest for a bid.


"There's a blue bird at my window
I can't hear the songs he sings
All the jewels in heaven
They don't look the same to me."
-Beck, Guess I'm Doing Fine (For An Old Friend)

"Then this ebony bird, beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance it wore,
'Though thy crest be shorn and shaven, thou, ' I said, 'art sure no craven.
Ghastly grim and ancient raven wandering from the nightly shore –
Tell me what thy lordly name is on the Night's Plutonian shore?'
Quoth the raven, 'Nevermore.'"
-Edgar Allen Poe (The Raven)

The DJIA topped 14,000 for the first time ever in the first half-hour on Tuesday. It closed below that level at 13, 971.55.

However, judging by the substantial liquidation in the futures after the close, this morning the DJIA will open meaningfully below Tuesday's close on news out of Bear Stearns (BSC) that two of its funds that invested in CDOs are "worthless". Hey, thanks for playing anyway, now take your bat and ball and go home.

Apparently some of this now worthless paper is the same parchment that was to be an early "stocker-stuffer" in a canceled IPO from Bear called, appropriately enough, Everquest.

Good name. Investors in the IPO would have been forever in a quest for a bid.

Market participants can debate all day whether the market's remarkable reluctance to absorb any kind of bad news, to sustain any kind of organic, natural, corrective price action of anything in the order of 10% over the past four years has been a sign of strength. Market participants can debate whether this year's stampede has been a sign of steroid strength, resiliency or mania. The important thing is that crowd behavior appears justified while in full sway. The more the self-serving and self-fulfilling the rationale – the louder the chorus, the sweeter the choir. That is until it finds itself preaching to itself, with no one left to supply a bid.

Such may be the case with one pugnacious pundit who proclaimed yesterday that the bears are going to get run over by an 18-wheeler on the New Jersey Turnpike. Oops! Who's gettin' jack-knifed Wednesday morning?

While DJIA 14,000 party hats and horns were being unpacked Tuesday morning, more significant issues will make Tuesday memorable. A funny thing happened on the way to the CDO containment versus contagion coliseum. The lion that whispered may be the mouse that roars. Cheap credit and miracle mortgages that allowed anyone who could fog a mirror to get a mortgage, which in turn drove the housing boom, which in turn drove the economic boom on the heels of the Home ATM Look Alike Contest, are behind us. The turmoil in the junk bond and derivative market that helped fuel the big Buy Out and the Buy Back in Equities Boom is not behind us.

And it has been the buy backs and buy outs that have been the bid and the buyer of first resort behind the bull: it is buy backs and buy outs that have shrunk the float of stocks. It is the easy money in the hands of low people in high places, the spark of high-heeled boyz with other peoples' money that has expanded the bubble of that shrinking float.

Last week I mentioned that the panic of '07 might have begun. The other day I mentioned how I didn't expect a "two-fer". Now it looks like we have a Cha-Cha-Cha going – a Three Way, as Wednesday morning we are going to see some crimson psychology at play. In my experience, the third move is usually the directional bias.

Click here to enlarge.

As the hourly charts show, a move below 1540 S&P sets up a test of 1530 – 1532.

Click here to enlarge.

However, a break of our old friend 1520/1521 pivot, which is where last Thursday's explosion began, and which coincides with a 50/20-day moving average Necktie of the S&P, will trigger an important sell signal. Why? A break below the old high of 1540 that offsets the triple top breakout signal given last Thursday is a red flag; while a confirming break below where the breakout commenced, i.e. 1520-ish, would trigger a Boomerang Sell Signal. It would suggest that programs stampeded big shorts to cover last Thursday in a Buy 'Em to Bang 'Em Strategy.

If so, it only serves to weaken further a market that stays down on Wednesday.

And, if the market stays down on Wednesday it could be ominous. Why? There are close to 50,000 155 Spyder Puts outstanding. Ordinarily, in normal circumstances, that many puts "would not be allowed" to expire as anything other than worthless into Friday with the S&P pinned to 1550 or higher, unless... unless someone big and powerful owns the lion's share of these puts, and has a big sell program in their hip pocket for expiration.

Because the S&P was heavily liquidated in the last hour on Tuesday, it leads me to believe that there is a big sell program around.

Click here to enlarge.

This is how the Raven plays high stakes poker. With so many 155 Spyder Puts outstanding, it suggests a break below this level would not occur unless it's a collapse into expiration.

No positions in stocks mentioned.

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