One Day's Controlled Disintegration Does Not Make A Capitulation ~ The Risk Averse Alert

Tuesday, July 29, 2008

One Day's Controlled Disintegration Does Not Make A Capitulation

I will forgo ranting about those blind souls who see light at the end of the financial industry tunnel, and continue my case for a pending stock market capitulation with no rant about today's seemingly positive market reaction to Merrill Lynch's chumming of shark infested waters ... running from Wall Street to Washington ... jam packed with varied species of pathetically weak creatures.

"Let them alone. They are blind leaders of the blind. And if the blind leads the blind, both will fall into a ditch."

Good advice. We shall see how many more blind fall in ... even were they a screaming bid tomorrow morn'.

No, there's no need to rant. But name names for posterity ... these fishers of bids ... inspired with dreams of yesteryear ... powerfully feeding the dull minded? Let no risk averse man be called Judas, then.

First accusing finger goes to the mad money man ... Mr. 0 for every macro forecast he's made since I, sometime way back, gave a 70% probability the S&P 100 was to fall below its March 17, 2008 low ... the author of the Helping Friendly Book ... the man who wrote the Helping Friend Book ... the one ... the only ... the special ... the great ... the knowledgeable ... the author of the Helping Friendly Book ... he wrote the book, okay ... he wrote the Helping Friendly Book ... and his name ... is ... Icculus.

Cramer is the great and knowledgeable Icculus.
Yeah! All his children are old enough to read Icculus.
A cold and lonely night.
Running the pace of the fright.
Look at a face tonight.

(Phish satire ... and when you read those lines to the music of Jaws, you might see how I imagine Cramer in times like these. A coming casualty presently frozen.)

It is not time for melt-up yet, Jim Cramer. Therefore, financials most probably have not bottomed. I have looked. July appears no more bottom than March.

Your victory celebration appears vulnerable to reality, Jim. It seems the free market breakdown is taking down big chunks of a tottering structure. Airlines? Autos? Nice work, Kudlow.

And why is the dollar not cratering? I am sure you will figure it out. Even though you can be ridiculous, you are by no means an idiot. I predict you will come to say as you already see (but refuse to believe?): controlled disintegration appears the order of arrangements underlying the present day.

That's the bomb Merrill detonated. Controlled disintegration. The death of denial is the bell Merrill tolled. We are fast approaching a reality phase-change. This truth and this truth alone was behind today's rally. It will be much the same during the coming melt-up.

In times like these students of history do not ignore tension concealed by a market reaction just too good to be true. Much as a healthy skepticism came in handy June 5, 2008 ... I suspect so again today.

All the more because Squeaky Maria "interviewed" two other well-traveled analysts who share Cramer's view. Though more tempered, they seem no less complacent given what's coming unglued.

I would not be so bold to stake this position were not the Elliott Wave Principle laying an analytical foundation supporting a view toward heightened volatility. True, nothing is set in stone. Still, all things suggest beware. There appears much deception. Today was no exception.

In fact, can it be otherwise, given momentous changes Merrill exposed to the world?

Call me sane. I see I am not alone...

[5:00 p.m.]
Returning to my presentation this morning...

NASDAQ 5-min

So far, a scenario similar to last Friday continues playing out. Is this count-trend advance over? Maybe.

Could kid NASDAQ rise further still ... carrying RSI to challenge this morning's peak ... possibly extending to a buy-side extreme, just like last Wednesday? Maybe.

Might today's weakening RSI ... diverging from NASDAQ's rise ... portend a decline twice as negative as yesterday's strengthening RSI proved positive today? Maybe.

Indeed, this would be most fitting confirmation a capitulation is nearly at hand.

NYSE 5-min

The same near-term possibilities here ... the same general outlook ... just a different exchange.

Some sort of price-RSI divergence might need to form before the NYSE Composite rolls over and dives to the area of its post-5.19.08 low set on Tuesday, July 15th. Thus, I continue waiting for confirmation of a low-risk opportunity to add an August OEX Put position to those I am already holding...

[1:30 p.m.]

As odd as this might seem, strong moves like today's help add clarity to the big picture. Nothing put forward last night is changed.

Per the developing shark feeding frenzy, I suspect we simply might be seeing positioning prior to the fallout ... a short squeeze helping stronger hands avoid the SEC's scrutiny.

The charts seem to agree. All indications advise looking out below.

NASDAQ 5-min

Today's pop on the Pump and Dump appears to be unfolding much like Friday's and further confirms expectations for trading within the price range established over the past couple weeks.

This morning's advance, however, begins a counter-trend rally one higher degree than Friday's (an Elliott Wave thing), and so commensurate RSI extension to a buy-side extreme stands to reason. Yet, this kind of mad rush has proven itself a ruse of late. Just look at last Wednesday.

The present moment appears to be setting up the finale to today's burst out of the gate, consolidating gains in similar fashion as the period from 11:00 a.m. to 2:00 p.m. on Friday. Likewise (and I think this is important), the move higher to NASDAQ's ultimate peak should be a struggle. This has been the trend over the past five days following what have proven unsustainable moves higher.

NYSE 5-min

Trading on the Big Board reveals a divergence of lower highs confirmed by higher RSI. This probably is setting up the NYSE Composite to fall still lower, much as was the case on Friday.

Now, just how today's counter-trend advance might conclude I cannot say. However, I will be looking to coincident action unfolding in the NASDAQ Composite for clearer indication when to add to current Put positions.

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