Another 90% Down Day – 07/18/11 © ™

  • Short Term
  • June 15, 2011 – Present
  • Action Status – Possible Sale Pending Subsequent Market Action

Today is the second 90% down day in the last 8 days.  We almost had a third 90% day last Thursday.  This is a lot of 90% down days in a short period for a rally phase???  Since June 15 we have had three 90% down days and two almost 90%.  During this same period there have been no 90% up days.  Usually a 90% down day is followed by a rally.  The recent 90% days have not had the normal type rally and this type of action should be watched carefully.

Two of the indexes that I follow have penetrated their lows of June 15, banks and semiconductors.  As long as this continues, it doesn’t bode well for the future.  Banks are where we keep the money and semiconductors are a prime mover of tech activity.  B of A needs to add another 50 billion to reserves due to bad loans.  If B of A needs to do this, they aren’t alone and other banks must do the same.

Jeff Saut (he’s very good) says we have to hold the 1295 area in the SP 500.  I won’t disagree with Jeff on this point.  1295 is the 62% retracement point and a Fibonacci line.  Today the market hit 1296 and rallied.  If the market can hold this level, whether we rocket away from this area or bounce along without a meaningful penetration is OK.  We are watching 1296 on the SP 500 and will bail out on a significant penetration.

This larger than expected correction following the June 15 rally has eaten away at most of the gains from our short term buy signal.  Taking a profit early would have been wise (20-20 hindsight) due to the possibility that large step 2, in progress since July 2010, may have ended on May 2, 2011.  Until we have confirmation that large step 2 has not ended early profit taking is advisable.

It is always possible to get caught in a whipsaw on this type of market action.  There is always the possibility that we could touch the June 15 lows and rebound strongly (or go down the drain).   A correction of this magnitude could be further bottoming action from June 15 OR it could be the beginning of step 2 down dating from May 2, 2011.   If this is step 2 down, we have a lot further to go on the downside.

A resolution to the debt negotiations should produce a rally but if that rally failed quickly, that would be the tip-off that things are going south.

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