Wednesday, August 20, 2008

August 20, 2008; First Dow Target, 9,000

The evidence is overwhelming that wave 3 of (3) down is now underway. My first Dow target is 9,000, but going below 8,000 is quite a possibility. I'll look at the wave structure and technicals once we reach the 9,000 level and see if it still has further to drop. This decline should be relentless; rallies should be small and/or quick. Now that a top is in there's not much to analyze. I'm fully invested in shorting the three major indices. I have absolutely no interest in getting in and out of the market, I'm simply going to just hold on to my short positions for the duration.

For the very short term, last night I noticed some heavy bullish divergence on the momentum indicators, especially the RSI and stochastics. I attached a 15min chart of the S&P above showing it. You can see at the bottom of the chart that the RSI was steadily climbing up (see black ascending trendline) and so were the stochastics, which are right below the RSI. Yet while both were going up, the price of all major indices were still dropping. When price drops and momentum indicators rise, it yells at us that a rally is coming. However, seeing as that this is a wave 3 of (3) decline, momentum indicators can often give false signals numerous times, and remain in oversold and divergent territory for a long time. So as I said earlier, even though I saw a rally was probably coming today, I'm in no way going to get too cute in this decline and try to call every short term top and bottom within this huge wave down. I'm just going to ride it out, knowing the overwhelming pressure is down, to much much lower levels. It's likely we need the rally to last all day today and possibly into part of tomorrow's session in order to relieve the divergences from the momentum indicators so the next wave of selling can resume. For the Dow, 11,500 should be a big resistance level because it's a 50% fibo retracement, a prior 4th wave area, and the place where it broke the ascending trendline on Monday. So I expect the Dow to test the 11,500 area. But in no way does more rallying have to happen, this is only a possibility to be prepared for. Ultimately, the market will go lower. Much lower.

1 comment:

Anonymous said...

This morning's rally to 1288.50 basis the E-mini Sep futures was a .618 retracement of the last drop down from the 1306 overnight high registered around the 18th. This week or next was the cycle high due that I have been speaking about. I believe this mornings pop off last nights lows was NEWS related to the possible purchase of Lehman by Korea Development Bank. How another USA brokerage firm being bailed out by another foreign purchase is GOOD news is beyond me. Anyway, this high could be it OR one more next week. Diver