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Minyanville's T3 Daily Recap: Extreme Volatility a Nation's Nightmare, But a Trader's Paradise


Watching how we bounce over the next week or so will be an important indicator of future action.

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Back on July 27th when the S&P broke its 50-day moving average, I stated we had enough technical damage to go to cash and sell macro longs. On July 28th Investor's Business Daily put the Big Picture in correction mode.

I started a series of posts highlighting the massive head and shoulders topping pattern, a very bearish set-up with a measured move down to the 1150 area. This was before we broke the 1250-1270 neckline. In the blog post from CNBC's Patti Domm, "Scary 'Head and Shoulders' Pattern Emerges in S&P Chart," I shared more commentary on the pattern, and the article was passed around the world on Drudge Report.

The NYSE was 20% off the highs after yesterday's close. The action has been fierce, unforgiving, and has taken no prisoners! Yesterday there were a lot of traders trying to buy the carnage for much of the day, and when people started throwing in the towel, that's when I thought a bounce could be imminent. I didn't expect the trade to be so volatile today, but the post-Fed announcement capitulation gave an even better opportunity to test longs.

However, the macro trade and market complexion has changed a ton. After breaking my 1255 S&P line in the sand, I've taken my year target down to 1275-1300 (which would be optimistic at this point to most).

Watching how we bounce over the next week or so will be an important indicator of future action. It will give us clues to whether this was over-emotional and exacerbated by margin calls, or whether it was "real". The wildcard is whether this action has done irreparable damage to the psychology of the market, fresh off 2008 wounds.

Technical Levels to Watch

1180 will be a very important level to close above on a daily basis. 1225 is the next zone. 1250 will be the huge line in sand. There are new levels of support: a very small one at 1102-1105 (this was last night's support area), then a bigger one from 1075-1085. Finally, there is a major, major zone at 1040-1050, which is the 9/01 igniting bar that started the move last September after Jackson Hole.

Some Causes of This Decline

One cause was the fight in Washington and the mud that politicians dragged the American public through on the world stage in late July. It was embarrassing and showed how ineffective our government has become. I agree with the S&P downgrade to AA+. They made a tough choice, but they're supposed to be objective judges of credit worthiness. That will hopefully lead to tougher decisions upcoming by our leaders.
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Positions in SPY, QQQ, AAPL, AMZN, BIDU

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