Would Uptick Rule Exacerbate Short Selling During a Melt-Up? ~ The Risk Averse Alert

Friday, November 21, 2008

Would Uptick Rule Exacerbate Short Selling During a Melt-Up?

Cramer's show opener tonight was a first-rate, top notch summary statement of the way I see things in the stock market...

Stocks are just one among many asset classes ... and a most liquid one at that. Sometimes, too, practical matters affecting their trading are independent of reasonable business prospects surrounding the issuing companies. That's just the way it is in the money management game.

In other words, there are many factors influencing the stock market. These go well beyond micro company analysis that's the typical fare of the financial industry and the media who report on business. Cramer's insights, indeed, belong under "Things I Believe," over to the left.

And since I brought it up, I wanted to briefly mention something about my belief that, "Sometime over the next 3-5 years the Dow Jones Industrials will fall to the vicinity of 3600."

Before the end of this weekend I am going to change "will" to "could." That's how strongly I feel about the probability a major bottom is at hand.

So, on this count I part company with Mr. Cramer, who is maintaining a defensive stance.

(You might duly note, though, his remarks about there being scores of cheap companies wishing to go private ... if only financing were available ... likely is a better informed view on potential sectors poised to outperform, should the market return to its winning ways ... as I strongly suspect is about to happen. Contrarily, I have been looking at the TARP as a means for financing an avalanche of shotgun M&A ... which appears the course Citigroup is being set up to take.)


The market's correction since October 2007 is textbook Elliott Wave. What of the wave count I have indicated above certainly is by no means set in stone. Plainly, however, three component waves — wave (a) down, wave (b) up, and wave (c) down — of a larger "corrective" wave have unfolded since last October's top. The five [unlabeled] waves forming wave (c) are just about completed.

Now, as you know, I use a handful of technical measures to help confirm the Elliott Wave structure I believe unfolding. This takes on several dimensions. Those of you who have been reading me for a time, I gather, see the light. Although I try to keep things simple, surely you recognize the dynamic nature of the analytical twists my methodology adds.

So, here ... being very near what I believe will prove a significant bottom ... with the fifth (and final) sub-wave of wave (c) forming ... we should expect technical conditions typical at turning points. And man are we ever flush with these!

From deeply oversold ... to divergences galore ... Don Luskin, perma-bull, in hiding (as would be Kudlow, too, if he didn't have a show to do) ... sentiment in the crapper ... fear about as high as I've ever seen it ... VIX at a record ... and no one — no one but me — thinking a spectacular melt-up is even possible.

First, though, we need a bottom...

So, take a look at RSI and MACD at the March 17, 2008 bottom. Their divergence from respective readings at a higher S&P 100 low in January '08 are plain to see. We see the same thing now relative to October. This is a good indication bottom is forming.

Looking more closely, you also see both measures diverge relative to their respective readings at a higher S&P 100 earlier in the month of March. This, I think, is what we should be looking for here, too.

One word of caution... The day we hit bottom could be a wild one. It's possible the market could be down big, intra-day, then finish with a roar higher.

If you're wary of my positive outlook, just be aware of this, because it might be a great time to close your eyes, hold you nose and establish a ProShares Ultra Long position. I took my first stab on Monday. Despite being down for the moment, I'm not one bit worried.

I will detail my position over the weekend with an overview of the big picture. For now, let me just say nothing changes my view about the market's advance from 1974 through October 2007. I believe for some years to come that advance likely will be corrected. The past year was but Part I.

What's still to come in the grand scheme of things may or may not lead to Dow 3600.

What's straight ahead, indeed, could be straight up...

Picture this. A legislative move to repeal "mark to market" accounting and/or reinstate the uptick rule. Imagine the reaction! You think the British Empire's boy, Timmy Geithner, made for a good close...

Fast Money
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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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