Last Chance to Get Out Comes Again

The last chance to get out before a much deeper fall is likely next week. The drop has spooked even the uber bullish CNBC, which trucked out a series of bears yesterday after the close. This is the biggest and fastest drop since the fall off the Jun11 top, and now expectations have grown that we at least drop another 5% or so to Sp980. Before buying into the CNBC view, let’s look at the underlying investor behavior and likely market moves next week.

First, we bifurcated down last Wed, confirming a major change of trend. Hence the minimal view that we replicate the type of drop we saw after Jun11 is sound. Whether it is much worse has not yet been confirmed by market waves (which reflect underlying psychology of market participants).

Second, the rally back over the trendlines and then second break is very bearish. What had been a support line – the trendline connecting the Mar9 start of the rally with the Jul8 bottom – should now become resistance. The psychology of hope broke when we crushed back down yesterday. A break of a trendline is often a false break if it reverses quickly. Instead this break got reconfirmed.

Third, we should now be prepared to see the proverbial Kiss Goodbye: a final retrace up to the trendline that kisses it and then fades. Doesn’t always happen but is a great indicator of a serious change of trend. The six-month trendline will no longer define the rate and direction of the market’s move. The drop will.

The wave structure in the Naz and S&P seem fairly clear: we have concluded a five-wave down move and now should have a wave 2 bounce. We might see a gap down Monday morning as the retail investor panics a bit this weekend and puts in sell orders; but either that day or Tues should show a sharp reversal. The STU notes that Wed is FOMC day, and the market may appear to rally into that day waiting for the FOMC report (and any interest rate changes) before fading after.

That rally is your last chance to get out. It should go back at least 50%, and that means it should kiss the trendline goodbye at around the Sp1061 pivot level one more time. (Math works simplest if we have a 15 or so pt drop Monday before the reversal: 1101 top to 1020 then 50% rally gets back to 1061.)Then a wave 3 down with higher intensity and a greater fall.

The wildcard is the Dow, which has not yet confirmed the break. Its lower trendline runs around 9600 on Tuesday and is rising about 20 pts a day. Interesting is that the STU has an alt count for the Dow which is much more treacherous and bearish. The implication is a minor bounce and then a deeper fall without the kiss goobye moment, A fickle mistress, that Dow! No more last chances!

You may wish to check out their reports next week, as I think it will be a free week. You can click on the flashing buttons on the right when they change to Free Week! I will also give a post to make it easy. Of course, if you click through from this site, I might eventually get paid a referral fee, so decide to reward me or not as you feel fit.

Neely is advising to stay out, meaning not take a position; and his count remains ambiguous as to structure and direction. Simply put, the bifurcation signals the change but needs to sustain the move down at a faster pace (sharper angle down) than the prior up move (measured by the slope of the lower trendline).

The USD should be on a rally for months, and commodities and commodity currencies like the Loonie or the AUD are expected to fall.

Bonds are still hard to call. A return of risk aversion likely means a widening of spreads – junk bonds have even higher yields (so they fall) and the Treasuries may drop. Yet over the first phase of this downturn we might see the long bond continue to higher rates, noting that the US Treasury still has huge amounts of debt to raise to cover the burgeoning deficit, and the Fed has tapped out its QE purchasing of Treasuries. I am watching the FOMC meeting for an indication that the Fed may continue QE, which should depress yields and be bullish for bonds.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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