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Bulls May Panic -- and Traders Could Get Trapped


It won't be 1987 all over again -- but the echoes are impossible to ignore.

Though many in the mainstream media looked to disappointing earnings from Lowe's (LOW) as the culprit for Monday's sell-off, the level of the market was set many hours before the open in Asia. We know where to look for the sun to rise. The market is taking its hue and cue from China. The range was elaborated hours before the open: we know where to look for who's directing traffic.

It's not that I'm looking for anything like the amplitude or magnitude of a 1987 crash, but as you know, the cycles I'm looking at do project downside vulnerability into September/October. I don't know what the level will be if accelerated volatility erupts, but the level of the market is less important than the risk. Risk has been underpriced. The whole rally was based on the idea of recovery, not earnings, which weren't based on increasing revenues for the most part.

It looks like the bulls kept shorting puts last week to drive the market up and added late Friday to prevent the market from collapsing. It backfired putting the market in a vulnerable position unless the S&P can offset 100% of yesterday's decline.

It's important to consider that legitimate reversals usually occur from down opens after a large rangedown day, not up opens. A big down open would be a cover shorts after the first hour. A gap open that can offset 1000 S&P will buy the bulls some time.
No positions in stocks mentioned.

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