Collapse Imminent? ~ The Risk Averse Alert

Wednesday, May 12, 2010

Collapse Imminent?

Whether beginning tomorrow or sometime over the next few days ... there's a good chance a calamitous stock market collapse could be imminent.

The other day I noted the similarity of last Thursday's swoon and intra-day recovery to volatile trading on April 4, 2000. Well, curiously enough, the market's subsequent reaction over the past four days likewise bears remarkable similarity to that prior period.


To wit, volume's steady contraction coinciding with this week's correction of last week's sell-off adds considerable gravity to the prospect that, last week was but the beginning of far worse selling yet to come. Last week — last Thursday (5/6/2010) in particular — was no capitulation. Instead, it appears we were treated to a letdown that has all the makings of becoming something of a panic.

Much like volume's behavior over the entire course of the market's counter-trend rally off March '09 bottom likewise indicated that selling preceding that bottom was likely to be followed by greater selling still, we are seeing a microcosm of volume's same foreboding behavior following last week's fall, as well.

Over the duration of the market's counter-trend rally off March '09 bottom volume's continual contraction suggested that, resumption of further, follow-on selling was not a matter of "if," but rather "when." In light of a similar volume trend coinciding with the market's [counter-trend] rally over the past few days it appears the appointed time for that long-anticipated bloodbath quite possibly has arrived.


Per NASDAQ's relatively more positive performance versus the NYSE, both off early-February bottom and over the past few days ... apparently investor consensus has it that, technology companies do not need a functioning global financial system in order to thrive.

This begs the question: was Alan Greenspan's "irrational exuberance" ever more insane? At least back in 2000 there was no Fed-subsidized carry trade and trillions of dollars swindled from taxpayers keeping a moribund banking system afloat.

Had a technically substantiated bottoming process developed prior to NASDAQ taking leadership — both off March '09 bottom, as well as presently — then my point here would be moot. However, no such development has taken place. Thus, NASDAQ's price leadership is as much a fake now, as it was in August '08, and then again from 2002-2007.

This conclusion is further confirmed presently by NASDAQ's underlying technical condition whose lag relative to the NYSE has been covered here previously.

Over the past few days an improvement in the market's general technical state had been thought necessary before any follow-through to last week's decline might develop. Well, today's trade largely sealed the deal.

The question now is how quickly might any further, steep decline unfold? Should the market's present similarity to early-April 2000 continue, the next leg lower might develop sooner rather than later ... and the damage it delivers might be considerably greater than any possibility mentioned here over the past few days. Something putting March '09 bottom in the cross hairs is not out of the question...

Fast Money
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