Working Down a Chain of Suckers ~ The Risk Averse Alert

Friday, August 19, 2011

Working Down a Chain of Suckers

With bank shares everywhere dropping like rocks and leading the charge to confirm the market's rally off March '09 bottom but a bounce in a larger bear market the risk of spectacular collapse now moves front and center. Whether this is likely to occur over the next couple weeks or the next couple months is the immediate question...


Following the Bank Index's April 2010 peak, the process of dying, though slow to begin, accelerated this month with violation of a long-standing line of support and rapid descent. Most notably were the index's gains of July-August 2009 largely eviscerated. The last line of suckers buying in from February-April 2010 already slaughtered, now come their predecessors' turn.

Yet just as the last line was given opportunity to defend their positions and press their bets following last May's swoon, now those earlier bank equity longs seem likely to have their moment, too. This appears a reasonable read on the current position of the Bank Index's momentum (bottom panel). With no shortage of starry eyed bargain hunters incredulous to reality of the banking system's insolvency, a lift in bank shares somewhat repairing negative momentum seems a reasonable outlook here.


Which is neither to say bottom to the market's current move lower is in, nor near enough at hand to produce any meaningful technical divergence indicative of a reversal of fortunes. Rather these are likely to develop as the market grinds lower over days ahead. With the S&P 500's objective remaining in the area of 1050-ish there's plenty of downside remaining for positive technical divergences to form in the interim.

Once this comes to pass focus then will turn to the manner in which negative momentum might be repaired. Prospect for a "running correction" forming in wave (2) of C position raised last week in "Support Turning Resistance, Stat" remains on the radar as a likely turn of events whose consequence still would serve to repair negative momentum in a fashion fitting a market on the verge of collapse.

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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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