Weekly Update 1-25-2010:

The market likely topped last Tuesday the 19^th.  

Last week we wrote….  ”In order to get further confirmation of an uptrend top the SPX needs to either break below the 1133 pivot area and head towards the 1107 area or, if this rally has one more spurt in it then it should hold the 1133 area and then make its run.  If it fails in its next rally attempt then we have likely seen the highs for this uptrend as of last Thursday.  We should know most likely this week.”

Last Tuesday, the 19^th, when this was written, the market had just come off of the previous Thursday’s high of 1150 with a down day on Friday, but held at 1136 just above the mentioned 1133 support area. That day it did rally and in fact reached an “ever so slight new high” in the S&P500 intraday of 1150.45 just edging out the previous intra-day high of the last Thursday of 1150.41 and furthermore closing near the high at 1150.23, so needless to say was about as close of a “retest” of that previous high as you could get and at this point still had “Bullish” possibilities.  However, the failure to reach and maintain a legitimate “new high” was quite evident when on Wednesday, Thursday, and Friday of last week the market plummeted over 50 points with a 5% drop in value crashing through the 1133 pivot area (which had been previous support) and slicing through the 1107 support area stopping at 1091, just shy of the S&P500 support/pivot area of 1090, in just 3 days!  This “avalanche” is the “shot across the bow” that appears to be the initial stages of the longer term downtrend that we have been speaking of now for months that should eventually “retest” the March 2009 lows of 666 on the S&P500.  In just three days the market wiped out all of the market gains it had slowly “ground out” in the last three months since the middle of October of last year in just three days!  That’s why I speak often about the importance of making “Risk/Reward calculations” before entering the market in a given direction.  It’s true that the market had been continuing in an uptrend for months and a “lack of patience” can lead to “wanting to jump into the action and go “long” just to get in step with the market” when prudence says that because the market was continuing to show so many signs of “exhaustion” our system just could not calculate in enough “Risk/Reward potential upside gain” in order to issue a new “BUY” signal under those conditions.  Therefore, it’s better to be patient and wait for the market to tell us what it is doing on a “longer term” basis before making a directional commitment just for the sake of “being in step” with the market for the short term and wait for some longer term confirmations.

However, because this drop has been so sudden and dramatic, it has “sparked” a total change up in the shorter term technical timing indicators of the market and now we will likely see volatility increase to where there will be very little time lapse between directional changes for awhile.  With version III of Core-Plus™ you can now expect to see even in this “Bearish” environment going BOTH Long and Short and possibly without very much time lapse in between until this volatility settles out again.  In fact, this three day move last week seems so sudden and drastic, the other “emotion” that causes problems, is the feeling that “yes, but now we’re being left behind” and we had better be quick now to jump into a “short” position.  Quick, maybe, but not reckless.  Because this beginning decline sliced through two and didn’t stop until a third support area, tells us this is more than just a simple correction in a continuing up market.  Instead, it pretty much signals that this is a major market turn and the beginning of a longer term descent that will however be broken up with some very strong intermittent “significant” upward rallies.  Therefore, we should have plenty of opportunities to not only “short” this market and make significant gains as the market continues to move downward, but also opportunities to go “long” from time to time taking advantage of the inevitable bullish responses to “oversold” conditions along the way.  As a matter of fact, if this current decline extends much further, this market may be so extremely “oversold” for the “short term”, that our next signal may possibly even be a “Buy” temporarily before entering into a “SELL” signal.  It will all depend on what kind of range would possibly be involved in the risk/reward calculation of the potential move.  Here again this is where we use technical analysis to estimate good “entry” points into the market after such a rapid drop.  Most likely, the scenario from here should be like a “bungee cord bounce” that after reaching an intermediate term “bottom” should retrace about half to three quarters, possibly more, of this drastic drop, that stops sufficiently short of the previous high, which depending on the range of these moves can possibly provide us with good “bullish” opportunities on the moves up as well as providing us an excellent “entry point” to go “short” this market and add to our gains on the downside movement as well..

This “sudden sell-off” will also give us an excellent opportunity to see what the (tongue in check)… “Monday Morning Plunge Protection Team” will do today.  As strange as it may seem, over the past 43 weeks, 80 percent of the price gains of this rally have come on 30 Mondays (or Tuesdays following Monday holidays)!  It’s as if some “backroom brigade” of “how can we keep this market propped up” wizards are figuring out how much money has to be thrown into the market each week to “prime the pump” enough to keep the “dumb money” to continue pouring into a market that has yet to demonstrate any real solid “fundamental” reasons as to why it should be increasing in value.  Furthermore, because the “buying surges” are not more normally distributed, it tells us that this has not been a broad-based rally; rather a suspicious rally that looks to have “deep sporadic pockets” intervention behind it.  This is a “first” in market history and really “smacks” of possible government (or at least some “VERY DEEP POCKET” entity) intervention trying to keep this market “propped up”!!  Though no one can prove this, it seems strangely suspicious to long term trading veterans who have no other explanation for such a bizarre phenomenon as this.  Whether this is the case or not, no amount of “trickery”, inept government “stimulus/bailout” programs, media hype or anything else will deter this market from the technical patterns that it appears to be mapping out.  There is a good likelihood that our entry setup could transpire very nicely yet this week.  Therefore, we will be watching closely and keep you posted.  Be ready to make an entry into the market (either direction) as it may be soon now.  Until then we will wait in CASH.  Yours for Safe Sailing in Bull and Bear Markets.