Call Me the Chip Diller of Stock Market Analysts... ~ The Risk Averse Alert

Thursday, October 09, 2008

Call Me the Chip Diller of Stock Market Analysts...

Humility requires I give Shemp his due... He correctly called for more selling on his Mad Money show of Monday, September, 22, 2008. Contrarily, I was more sanguine.

As mentioned yesterday, I locked myself into a view supposing lows set intra-day on Thursday, September 18, 2008 would hold. I thought this would be the base from which a sizable rally would unfold. Although I continue in the view a screaming rally is likely to commence once bottom is set shortly, I will not resist swallowing my fair bit of humble pie when it is entirely deserved.

For someone who has been rather negative toward the stock market's prospects over the past many months, you might think I would have been all over this recent decline. As I indicated yesterday, there was, in fact, something portentous revealed by the NYSE McClellan Oscillator. (I will detail this sometime over the weekend.) Had I not chosen to discount its possibility, I might have been way ahead of this wicked curve we've been served.

Now, in my own behalf I should make clear, too, all recent commentary indicating "bottom is at hand" ... "near" ... "imminent" ... whatever ... was (and is) meant to be forward looking toward what I perceive is the path of least resistance. I will argue various technical measures consistently have confirmed this view ... equally as much over recent weeks as they do right now.

So, consider this forward-looking analysis, then, as being similar to commentary I made from April-May '08 ... arguing then the market's decline since October '07 had not yet witnessed a "capitulation" ... presenting this line of reasoning in the midst of a rising stock market.

My analysis proved worthy then. I hope it will do so again, now.

So, as a community service to any hyperventilating, panicked readers, let's take a look at the big picture...

OEX weekly

Not only is it a long way to Tipperary, it also is a long way to Dow 3600 ... which is where the Granddaddy of all Stock Indexes last traded in 1994. Projecting this objective similarly on the above chart of the S&P 100, you see the market's present move lower might be likened to a scratchy throat. It is but the start of selling poised to precipitate Monsieur Market's coughing up a giant loogy sometime over the next few years.

First, though, what's next could be likened to an attempt at clearing one's throat, hoping the scratch will disappear. This is the big bounce I am anticipating — the largest advance in over a year.

Just look at the S&P 100's RSI... It is at a sell-side extreme worse than any seen over 2001-2002, and it is screaming, "Bounce!"

OEX 5-min

When yesterday I suggested a bounce up to Monday's close (10.6.08) ... followed by a final bout of selling ... resulting in technical divergences galore ... the above chart of the S&P 100 over the past ten days shows what I believe might be in store.

And how about those 15-point increments delineating the scale on the above 10-day chart? Ten days! Insanity!

If nothing else, what we've seen these past couple weeks raises the need for "Guaging the Stock Market's Selling Avalanche Risk." This, I suspect, might characterize the bulk of stock index declines toward levels last seen in 1994. The presently accelerating evaporation of confidence heightens this probability.

I'll spare you tonight my analysis of various underlying technical measures... They all generally diverged today from recent lows. So, technically speaking, this provides further first-signs selling is washing out. (Now, all we need are buyers!)

VIX is skyrocketing (demonstrating extraordinary levels of fear) and both the NYSE and NASDAQ McClellan Oscillators continue cratering. Being "the trend is your friend," I hesitate to join Squeaky in asking, "When does it end?!" Still, I continue to believe it's time for an eye-popping bounce.

As far as I am concerned, any continuation of selling during Friday's open should result in a 5-minute RSI divergence and the market immediately reversing higher. I suspect we'll see another monetarist monkey freak show taking pre-market futures on a wild ride prior to the start of trading. Seems to me something has to be done to forestall hedge fund margin calls...

Tonight's Fast Money Reveals...
The Panicked Wall Street Trader As Contrary Indicator
(Someone get Joe Terranova a Valium!)

Fast Money
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