Surviving and Thriving in a Perfect Stock Market Storm ~ The Risk Averse Alert

Thursday, May 01, 2008

Surviving and Thriving in a Perfect Stock Market Storm

Today was a tiny taste of things to come. Once the stock market bottoms and launches into melt-up mode, it probably will be a thing to behold. Look how RSI behaved during the bulk of the day's strong advance ... particularly in the NASDAQ Composite (which led the way today straight out of the gate; more on this below). It was steady as she rocketed higher.

NASDAQ 5-min

Such a solid advance with barely a blip in RSI going into the 1:00 hour (just right of the vertical red line)... We should see a lot of this once the stock market's melt-up gets under way ... indexes will cover a lot more ground, too.

What's with that red vertical line, you wonder?

Take a look at this morning's trading in the NYSE Composite...

NYSE 5-min

That's interesting. While the favored exchange for boiler rooms all across America was launching on a moon-shot, the white-shoes were languishing. Badly.

All I know is this. Given recent history (say, the past 10 years), the deluge of Wall Street created liquidity has had a far easier time pumping and dumping stocks trading on NASDAQ than on the NYSE.

So, seeing this today is a little curious ... following a bad day at the Uncle Sam trough (yesterday).

I do not suppose the coming stock market melt-up will find things any much different (at the core). As I alluded the other day in a headline saying it's a freak show beneath the veneer ... there are some serious, serious issues besetting the global financial system.

Indeed, it is the institutional reaction to these that, I believe, virtually assures the stock market will melt up over the months ahead. But deep down there's great fear. Even now it would yield rapidly. I believe in a matter of days it will.

I also believe the utter vulnerability whose exposure has only just begun might imminently result in a political power grab ... possibly in the form of a repeat of the Night of the Long Knives ... or by way of a second, size 9-11 shoe. This is not to say something socially traumatic must coincide with the mini melt-down that's on the doorstep. However, I for one will not be surprised if it does...

One more thing. My babbling today about pumping and dumping stocks trading on NASDAQ is not meant to be whiny cover for my concluding remarks yesterday. I thought the let-down (post-Bernanke helicopter drop) likely would continue.

What can I say? Just two things...

One, I was wrong. And two, watch for this same kind of quick reversal higher during the imminent stock market mini melt-down ... both on the way down and at the bottom. So, tuck this lesson away. It might prove very profitable in the near future.


Yesterday I said, "we might see a break from the price-RSI pattern's similarity to last October '07." Today I am not so sanguine. The present price-RSI relationship might not differ much going into the top that's pending.

I still think now would be a good time for those several "Aha!" technical divergences to begin taking form. Alas! They are. More on this below.

Still, today's price-RSI confirmation suggests there's higher to go. I marked a spot early October '07 (above) estimating how close we might be, right now, from suddenly turning lower.

OEX 5-min

Today's RSI was the best showing since two Fridays ago (4.18.08, right at the open). This suggests the S&P 100 will rise still higher ... but just once more ... and probably not before the stock market is pressured for a day or three (or maybe just an hour).

But right now ... there might be a punch still higher tomorrow ... before the pause ... preceding a last-gasp advance ... to the precipice.

How much higher first?

Well, I drew the same [meaningless] lines on the 1 year OEX chart ... and right above the top line is the 200 day moving average. So, not much higher ... at most.

As I said, the right kind of technical divergences are starting to take form. These simply increase the odds some greater measure of underlying weakness is spreading. This raises the probability a top is at hand.

Jill, when I look at the NYSE Composite McClellan Oscillator since its January '08 bottom, I see trouble ahead. How deep the doubt going into the March 17, 2008 retest! How shallow is confidence right now!

And the Summation Index ... an Elliott Wave Guy's confirmation ... fast waters ahead.

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Bernie said...

What sort of affect, if any, do you think the Fed accepting auto loan and credit card backed bonds have on the possibility of a March 17th low retest? Is the market convinced by such a gesture or is it all in vain?

TC said...

I think it's a double-edge sword that fits perfectly into my mini-melt-down ... followed by a melt-up ... thesis.

Some rightly see a systemic break-down by what the Fed is being forced to do.

Some, too, rightly see a wall of liquidity waiting to be put to profitable use.