Market Man Spots Deer in Headlights of Runaway Freight Train ~ The Risk Averse Alert

Monday, April 14, 2008

Market Man Spots Deer in Headlights of Runaway Freight Train

All indications appear eerily ominous ... as though selling could rapidly descend upon the stock market like a crushing tidal wave ... and yet, there remains the look of a floor beneath which would not long be breached. Should selling proceed rapidly, then, a number of positive divergences might further develop and all the more set the stage for a rapid market melt-up.

OEX 5-min

Friday's (4.11.08) decline took the S&P 100's RSI below its low set when the index gapped lower at the open on Tueday (4.8.08). That's "confirmation" suggesting the stock market has further to decline.

Last Thursday's (4.10.08) RSI peak should be exceeded before the S&P 100 has a shot at bottoming.

RSI divergences registered Friday (4.11.08) and today as the S&P 100 moved lower look a lot like those occurring last Monday, Tuesday and Wednesday. And we know in each case this resulted in the S&P 100 declining still further soon after. The trend is your friend.


The narrow channel I've pointed out a couple times before — supposing a "best case scenario" for much of the duration of April, wherein I anticipated the S&P 100 would likely stay in the range it has traded over the past two and a half months — looks broken. This suggests the 40% probability I have given to the S&P 100 breaking below its March 17th low is all the more certain now.

We might see a day or three where the S&P 100 hugs the lower end of the channel drawn on the above chart, while at the same time RSI turns up toward 50 (where buying and selling strength are balanced). Then, later this week might begin an accelerated, climactic decline briefly taking out the intra-day low registered on March 17th.

My gut sense is, as March 17th's low is approached, we then might imminently see a day when trading opens with a spectacular thud and finishes with an equally sensational recovery. This would mark bottom to the stock market's multi-month decline as well as (quite possibly) the start of a powerful melt-up...

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