Sunday, August 8, 2010

The Weak Ahead

No, I didn't mispell "Week" in the title of this post. But thanks for fact checking me. IIt's just a play on words since this upcoming "week" looks "weak" for the market. Get it? Okay it was dumb, I know, and I shouldn't have wasted people's time with it. But I'm just a few hours away from beer and baseball time and I'm on summer cruise control right now.

Friday's action looked promising at first, but again volumes didn't enter the market that would suggest a large wave 3, or sustained decline, was starting. The NYSE volume remained beneath the 1 billion shares level. But it was a Friday, and I still thought we could easily just have light volume for that reason, and then Monday we'd get continuation of the decline with higher volume. Wrong. The market again reversed into the close on an impulsive looking rally. So it seems the market might not be quite ready to roll over. But boy is it close.

The sharp selloff and reversal higher is still well in line with the weak diagonal looking pattern that the market has formed since the July 1st low. So the choppy, hard faught, up/down rallying continues. The reversal suggests the market might still grind out at least one more new high. It's not guaranteed by any means, but it looks likely at this point and I want to be mentally prepared for it.

What I'd really like to see to get aggressively short is a sharp rally that will act as a vacuum that sucks up all the remaining hesitant bulls into this rally from July 1st. A sharp move higher, preferably above the upper ascending trendline I have shown in the above chart, and then reversal the same day would be the perfect scenario to call a top and rush into the short side in my opinion. If that happens, it could easily happen very early this week. A rally to a new daily high, and then reversal and close to beneath the prior day's intraday low would be a picture perfect scenario to get short into that close. But regardless, the market's upside looks quite limited at this point, and the easy money to the upside has probably already been made, while the downside potential is quite large so that's where my focus is.

The divergences between other indices remains in place. (click here for the post on this topic).

Okay, I gotta get ready for Miller Time and the Red Sox vs Yankee game tonight. Hope you all are enjoying your summer!



hamid said...

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Dave427 said...

Todd - I am trying to understand the sovereign debt issue. I am reading that Hungary is in real trouble and is likely to default. I understand the implications of a person defaulting (bankruptcy, bad credit score, inability to borrow, etc.), but what happens when an entire country defaults? Normally, creditors seek payment on "bad" debt any way they can like requiring the debt holder to liquidate assets and pay the debt. Could that happen to Hungary - selling off assets to pay debts? Didn't Greece recently put up some islands for sale? In the US, courts enforce payment of debts, but what court would enforce payment of sovereign debt? If Hungary defaults, are their debts simply dissolved and the "problem" is then passed on to the lender? If so, this could start a domino effect and then what happens to the last lender standing?

If a domino effect happens and rages across Europe and eventually the world, would the end result be that everyone would have to stop financing since no one would buy anyone's debt again, and that all countries would have to financially "start over" and live within their means?

PrincipleAnalysis_Blogspot_Com said...

Hi Dave. My answer is "yes" to pretty much all you asked. When an entire country defaults it means that they are not going to repay their lenders. So in the US, that's the equivalent of the US government not paying owners of US treasures. Since most countries, including the US, live beyond their means, they need borrowed money just to function on a day to day basis. This means that they need lenders to give them that money. And lenders will only lend if they feel confident they'll get paid back. The problem is that when a country borrows too much while revenues decline or cannot support the rate of borrowing, the bond market will demand a higher interest rate. The higher the interest rate, the more pressure it puts on the country's finances, and therefore will eventually mean the bond market will want an even higher interest rate. It then spirals out of control until the interest rate demanded is just too absurd, like what happened in Russia, and the country has to default and "start over". The major problem here is that no one will lend the country money, and since their normal way of life was dependent on that borrowed money, it means catastrophe for the people of that country. And just like you said, it creates a domino effect since everything is so global and tied together it will effect almost any nation tied into the financial markets. This is the dangers and problem of deflation Prechter is always talking about. It's a downward spiral that feeds off itself and nothing can really be done to stop it. It just needs to run its course pretty much. In the end, especially if Precther is right on his Dow 400 call, then yes the world will probably be back to living within their means and people will be buying cars and houses with mostly straight up cash instead of a fat loan with several years of payments enslaving them to a bank.

PrincipleAnalysis_Blogspot_Com said...

Check out this article I dug up too:

PrincipleAnalysis_Blogspot_Com said...

My pleasure. Glad you're reading!